The Politics of Flat Taxes
||Original Paper: WP 14-42R|
We study the political determination of flat tax systems using a workhorse macroeconomic model of inequality. There is significant variation in preferred tax policy across the wealth and income distribution. The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) essentially zero transfers. This policy is supported by a coalition of low- and middle-wealth households. Zero labor income taxation is supported by households with below average wealth, while the middle-wealth households prefer to keep the transfer (and thus other tax rates) low. We also show that the outcome is sensitive to assumptions about the voting power of household groups, the degree of wealth and income mobility, and the forward-looking nature of votes.
Keywords: Political Economy, Essential Set, Voting, Inequality, Incomplete Markets.
JEL Codes: D52, D72, E62.
Suggested citation: Carroll, Daniel R., Jim Dolmas, and Eric R. Young. “The Politics of Flat Taxes.” 2019. Federal Reserve Bank of Cleveland, working paper no. 14-42R2. DOI: https://doi.org/10.26509/frbc-wp-201442r2.