Income Taxation: Is Progressivity Fostered by the Left and Hampered by the Right?

Abstract

This study examines the strategic use of progressive income tax reforms in retaining political incumbents. We propose an incumbent -- challenger model in which parties care about winning the elections and implementing their ideal level of public good. The incumbent first selects a certain income tax scheme; subsequently, the challenger proposes its level of public good. When conditions for convergence in public good provision do not meet -- and there is high uncertainty about the median and low office-seeking incentives -- we find that Left-wing incumbents implement highly progressive tax schemes, whereas Right-wing incumbents implement minimally progressive tax schemes. Intuitively, more progressivity increases middle-income voters' demand for the public good, and less progressivity exerts the opposite effect. However, when conditions for convergence in the public good meet, incumbents (on both the Left and Right) propose moderate progressive tax schemes.