Political Competition and Mirrleesian Income Taxation: A First Pass

We study Downsian competition in a Mirrleesian model of income taxation. The competing politicians may differ in competence. If politicians engage in vote-share maximization, the less competent politician’s policy proposals are attractive to the minority of rich agents, whereas those of the competent politician are attractive to the majority of poor agents. The less competent politician wins with positive probability, which gives rise to a political failure in the sense of Besley and Coate (1998). Political failures are avoided if politicians maximize winning probabilities. Nevertheless, the two equilibria cannot be Pareto-ranked, the minority may be better off under vote-share maximization.electoral competition, non-linear income taxation, candidate quality

Essays on public goods provision and income taxation

This dissertation is concerned with the characterization of schemes of taxation and public good provision that are optimal from a welfare perspective. The analysis is based on the assumption that individuals are privately informed about their valuation of the public good and that an optimal rule for public good provision reflects this information. As a consequence, an optimal provision rule has to be based on some procedure of information aggregation that allows this information to be acquired. The tax system is a key determinant for the task of information aggregation. If individuals are asked to communicate their valuation of the public good to "the system", they compare the utility gain from a larger level of public good provision to the utility burden that results from the need to generate larger tax revenues to cover the costs of public good provision. Individuals will hence communicate their "true" valuation of the public good only if these two forces are commensurate. These considerations demonstrate that the problem of finding an optimal tax system is intertwined with the problem of finding an optimal rule for an informed decision on public good provision. An analysis based on the presumption that information on public goods preferences just happens to be available is too naive. Individuals might refuse to reveal this information because a higher level of public spending affects their personal tax bill. This concern is the topic of this dissertation. Each chapter contains a characterization of optimal tax schemes and provision rules under the premise that information on public goods preferences needs to be acquired. A theory of optimal taxation and public good provision in the presence of uncertainty identifies outcomes that take specific constraints into account and are optimal under a given welfare function. Institutional constraints determine the set of tax instruments used for public goods finance. Technological constraints enter the analysis via the cost of public good provision that determines the tax revenue requirement in the public sector budget constraint. Finally, there are informational constraints. Individuals are privately informed about their public goods preferences. Hence, an optimal policy can use only those pieces of information that individuals are indeed willing to reveal to the system. Considerations of political feasibility enter the analysis via this latter set of constraints. Information can be acquired only if it is used in a way that is in line with the interests of individuals. These interests in turn are shaped by the tax system and the provision rule for public goods. The derivation of a normative benchmark that takes all these constraints into account is of limited use when it comes to recommendations for actual public policy. However, it provides a better understanding of their interplay and of the restrictions that become effective even under an ideal tax system. For instance, chapter 4 of this dissertation identifies a tradeoff between the desire to have an optimal redistributive tax system for a given level of public good provision and the problem of acquiring the information that is needed to determine the optimal quantity of the public good. It is shown that these two tasks can not be achieved simultaneously; that is, even the best policy-maker is not able to escape this problem. In more abstract terms, a theory of optimal taxation, public good provision and information acquisition yields a characterization of constrained efficient allocations. In addition, with a given welfare assessment, optimal constrained efficient allocations can be studied. As an example, it is shown in chapter 4 that a constrained efficient utilitarian tax system displays a complementarity between the extent of redistribution and the decision on public good provision -- relative to a situation where informational constraints are not taken into account

Politically Feasible Reforms of Non-Linear Tax Systems

We study reforms of nonlinear income tax systems from a political economy perspective. We present a median voter theorem for monotonic tax reforms, reforms so that the change in the tax burden is a monotonic function of income. We also provide an empirical analysis of tax reforms, with a focus on the United States. We show that past reforms have, by and large, been monotonic. We also show that support by the median voter was aligned with majority support in the population. Finally, we develop sufficient statistics that enable to test whether a given tax system admits a politically feasible reform

The Threat of Capital Drain: A Rationale for Public Banks?

This paper yields a rationale for why subsidized public banks may be desirable from a regional perspective in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through a public guarantee. Under some conditions, cooperative banks can perform the same function without any subsidization; however, they may be crowded out by public banks. We also discuss the impact of the political structure on the emergence of public banks in a political-economy setting and the role of interregional mobility

A note on optimal income taxation, public goods provision and robust mechanism design

We study how an optimal income tax and an optimal public-goods provision rule re-spond to preference and productivity shocks. A conventional Mirrleesian treatment is shown to provoke manipulations of the policy mechanism by individuals with similar interests. We therefore extend the Mirrleesian model so as to include a requirement of coalition-proofness. The main results are the following: first, the possibility of preference shocks yields a new set of collective incentive constraints. Productivity shocks have no such implication. Second, the optimal policy gives rise to a positive correlation between the public-goods provision level, the extent of redistribution and marginal tax rates

Optimal Tax and Expenditure Policy with Aggregate Uncertainty

We study optimal income taxation and public-goods provision under the assumption that the cross-section distributions of productive abilities or public-goods preferences are not known a priori. A conventional Mirrleesian treatment is shown to provoke manipulations of the policy mechanism by individuals with similar interests. The analysis therefore incorporates a requirement of coalition-proofness. The main result is that increased public-goods provision is associated with a more distortionary and a more redistributive tax system. With a conventional Mirrleesian treatment, the level of public-goods provision is not related to how distortionary or redistributive the tax system is