Incentives for progressive income taxation

Abstract

This study analyzes the electoral incentives for redistributive income taxation when the incumbent strategically decides the degree of tax progressivity. Progressivity makes the median voter prefer more government spending, which induces left-wing incumbents to foster progressivity and right-wing incumbents to propose flat taxation. However, if (i) more progressivity reduces middle-income voters’ fear of left-wing policies with respect to right-wing policies, (ii) parties’ office holding incentives are high, and (iii) there is low uncertainty about the median voter, then left-wing incumbents opt for less-progressive taxation and right-wing incumbents opt for more progressive taxation. In addition, we show that voters’ risk aversion over private consumption implies that right-wing incumbents propose more progressivity in comparison with left-wing incumbents proposing less progressivity. Our theoretical prediction can explain why, for example, Democrat Kennedy contributed to decreasing progressive taxation and Republican Bush contributed to increasing progressive taxation.