Working Paper

The Politics of Flat Taxes

Abstract: We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors?the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting?in determining the equilibrium mix of taxes.

Keywords: Political Economy; Incomplete Markets; Essential Set; Inequality; Voting;

JEL Classification: D52; D72; E62;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2017-09-06

Number: 14-42R

Note: First version December 2014, with the title, “Majority Voting: A Quantitative Investigation.”