Tax avoidance and the political appeal of progressivity

Different theories have attempted to explain why contemporary societies have adopted marginal-rate progressive taxation schemes. One possible way of justifying this fact is to interpret the choice of a taxation scheme as the outcome of a political game between two office-seeking Downsian political parties. One can think that in such a game the existence of a majority of relatively poor voters will be enough to justify this choice. However, recent results show that at equilibrium self-interested voters do not always choose marginal-rate progressive taxation schemes in this game. We provide a refinement of the basic theory by introducing tax avoidance and showing how it affects the equilibrium outcome of the political game. We first characterize the set of mixed-strategy equilibria of the game in the case of quadratic taxation schemes, showing that tax avoidance enhances the election of marginal-rate progressive tax schemes. Second, we analyse a ``wiggling" taxes' case proving that tax avoidance leads, when ``efficient" enough, to the election of progressive taxation schemes with probability one.