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Federal Reserve Bank of Cleveland
The Politics of Flat Taxes
We study the political determination of flat tax systems using a workhorse macroeconomic model of inequality. There is significant variation in preferred tax policy across the wealth and income distribution. The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) essentially zero transfers. This policy is supported by a coalition of low- and middle-wealth households. Zero labor income taxation is supported by households with below average wealth, while the middle-wealth households prefer to keep the transfer (and thus other tax rates) low. We also show that the outcome is sensitive to assumptions about the voting power of household groups, the degree of wealth and income mobility, and the forward-looking nature of votes.
Cite this item
Daniel R. Carroll & James Dolmas & Eric R. Young, The Politics of Flat Taxes, Federal Reserve Bank of Cleveland, Working Papers 144202, 25 Sep 2019.
Note: First version December 2014, with the title, “Majority Voting: A Quantitative Investigation.” First revision September 2017 with the current title.
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
Keywords: Political Economy; Essential Set; Voting; Inequality; Incomplete Markets
This item with handle RePEc:fip:fedcwq:144202
is also listed on EconPapers
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