A politico-economic model of public expenditure and income taxation

Laura Mayoral () and Joan Esteban ()
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Laura Mayoral: CSIC and Barcelona GSE

SERIEs: Journal of the Spanish Economic Association, 2019, vol. 10, issue 3, No 11, 479-507

Abstract: Abstract This paper contributes to the literature on majority voting over fiscal policies. We depart from the standard model in two dimensions. First, besides redistributing income, the government uses the net tax revenue to finance the provision of goods and services that become in-kind transfers to the citizens. By deciding on the composition of this expenditure (education, health, law-and-order, etc.), the government chooses the allocation of the benefits to the different income segments. This choice is a fundamental ingredient of fiscal policy. Second, we tackle the problem of choosing the income tax function and the composition of public expenditure by assuming that the political process selects one of these issues as the salient one. Political controversy and vote focus on this issue exclusively. The other dimension is determined in a way so as to minimize objections (obtain consensus) among the voters. We analyze the case where the salient policy is the composition of public expenditure. We show that for each voted expenditure policy, there is a unique income tax function that attains consensus. The political process we model yields that the progressiveness of the income tax schedule depends on income inequality interacted with the elasticity of substitution of the goods provided in the market and those publicly provided. This relationship is confirmed in our empirical test.

Keywords: Government policy; Income taxation; Inequality; Public expenditure; Size of government (search for similar items in EconPapers)
JEL-codes: H23 H50 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Working Paper: A Politico-Economic Model of Public Expenditure and Income Taxation (2015)
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DOI: 10.1007/s13209-019-0198-4

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