The Demand for Income Tax Progressivity in the Growth Model
This paper examines the degree of income tax progressivity chosen through a simple majority vote in a model with savings. Households have permanent differences with respect to their labor productivity and their discount factors. The government has limited commitment to future policy so voting is repeated every period. Because the model features mobility within the wealth distribution, the median voter is determined endogenously. In a numerical experiment, the model is initialized to the 1992 U.S. joint distribution of income and wealth as well as several statistics of the federal income tax distribution. Support for a high degree of progressivity is widespread. In the long run, households that vote for lower progressivity have high labor productivity and/or very high wealth. A movement towards greater progressivity decreases aggregate capital and income as well as long-run income and wealth inequality.
JEL Codes: E21, E62, H24
Keywords: Heterogeneity, progressive taxation, wealth distribution, electoral competition
Suggested citation: Carroll, Daniel R., 2011. “The Demand for Income Tax Progressivity in the Growth Model,” Federal Reserve Bank of Cleveland, Working Paper no. 11-06.