Majority Voting, Progressive Taxation, and Income Inequality

Abstract

ABSTRACT A challenge for the political economy literature is why the average tax rate becomes less progressive while wage inequality increases with the skill premium. This paper contributes to the literature by developing a majority voting equilibrium model in which households choose their most preferred tax schedule under increasing inequality. We find that majority voting favors a marginal tax rate to fund transfers, where the average tax rate increases with income, when the median skill level lies below the mean skill level. The average tax rate becomes less progressive when required government revenue relative to mean skill increases. These findings reconcile the literature with recent empirical trends and are robust to relaxing the assumptions of exogenous government spending and endogenous labor supply.