Majority choice of tax systems in single- and multi-jurisdictional economies

Abstract

We examine majority choice of tax instruments in an economy with heterogeneous households. In our framework majority voting equilibrium exists despite the multidimensional policy choice set. We examine single and multi-jurisdictional economies. We identify five competing incentives that influence choice of tax instruments. Equilibria generally entail a mixture of tax types. With multiple jurisdictions, strong reliance on head taxation in rich communities arises to deter poorer households from immigrating, in spite of local incentives to use alternative tax instruments to redistribute wealth. If relocation costs preclude inter-community mobility, the equilibrium tax system is fundamentally affected, with redistribution incentives then dominating choice of instruments and tax rates. Limiting or eliminating head taxation fundamentally alters stratification, public good provision levels, and tax systems.