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The demand for income tax progressivity in the growth model

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  • Daniel R. Carroll

Abstract

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 increases aggregate capital and income, but it effects only a small decrease in long-run income and wealth inequality.

Suggested Citation

  • Daniel R. Carroll, 2013. "The demand for income tax progressivity in the growth model," Working Papers (Old Series) 1106, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1106
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    References listed on IDEAS

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    Cited by:

    1. Carroll, Daniel R. & Young, Eric R., 2011. "The long run effects of changes in tax progressivity," Journal of Economic Dynamics and Control, Elsevier, vol. 35(9), pages 1451-1473, September.
    2. Daniel R. Carroll & Jim Dolmas & Eric Young, 2015. "Majority Voting: A Quantitative Investigation," Working Papers (Old Series) 1442, Federal Reserve Bank of Cleveland.
    3. Gustavo de Souza, 2022. "On Political and Economic Determinants of Redistribution: Economic Gains, Ideological Gains, or Institutions?," Working Paper Series WP 2022-47, Federal Reserve Bank of Chicago.
    4. Daniel R. Carroll & Eric Young, 2009. "A note on sunspots with heterogeneous agents," Working Papers (Old Series) 0906, Federal Reserve Bank of Cleveland.

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    Keywords

    Income tax; Taxation; Income distribution; Wealth;
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