What Constitutions Promote Capital Accumulation? A Political-Economy Approach

With the standard neoclassical growth model and an assumption of sequential voting on tax rates, we derive predictions for actual tax outcomes as a function of, on the one hand, the distribution of wealth and, on the other, specific elements of the fiscal and political constitutions in the economy. More precisely, we study how the frequency of elections and the lag between policy decision and policy implementation influence equilibrium tax rates, economic growth, and welfare. We also let the degree of progressivity in the tax code be a parameter of the constitution, and we study how it influences outcomes. We find that constitutional change may lead to large, long-run effects on economic performance. In particular, we find that the more frequently taxes are voted on, and the shorter the policy implementation lag, the higher are taxes in equilibrium, and the lower is growth and welfare. We also find that the more progressive is the tax code, the weaker are the distortions implied by the political transfer system. However, the quantitative effects from changing the progressivity of the tax code are much smaller than those resulting from changing the timing of elections.