Representative democracy and capital taxation

Abstract

In this paper we study a political model of capital taxation. Voters who differ in their relative shares of capital and labor income choose tax policy under majority rule. We compare two political regimes: direct democracy, where the voters vote directly on the policy; and representative democracy, where they elect a representative who then chooses policy. In both regimes some form of commitment by the voters is necessary to avoid excessive taxation of capital. But the necessary commitment under representative democracy corresponds closely to that provided by the actual institutions of most democracies.