Politically Feasible Reforms of Nonlinear Tax Systems

Abstract

We study reforms of nonlinear income tax systems from a political economy perspective. We present a median voter theorem for monotonic tax reforms, reforms so that the change in the tax burden is a monotonic function of income. We also provide an empirical analysis of tax reforms, with a focus on the United States. We show that past reforms have, by and large, been monotonic. We also show that support by the median voter was aligned with majority support in the population. Finally, we develop sufficient statistics that enable to test whether a given tax system admits a politically feasible reform. (JEL D72, H21, H24)

How to Tax Different Incomes?

“…This extension is also on our research agenda. Extending the analysis of political feasibility of tax reforms by Bierbrauer et al (2021) to our environment with general equilibrium effects and cross-base responses is another important research direction.…”

Assessing income tax perturbations

“…With its emphasis on political feasibility, Bierbrauer et al (2021) have a different focus than our paper. From a welfare-analytical perspective, the approaches show both similarities and differences.…”

“…In the wake of Feldstein's emphasis on tax reform analysis, a series of papers addressed in a theoretical framework the effects of small commodity tax reforms, often called tax perturbations (Diewert, 1978;Dixit, 1975;Guesnerie, 1977). Piecemeal income tax reforms have received attention only more recently, see Golosov et al (2014), Saez (2001), Hendren (2016) and Bierbrauer et al (2021). Most of the reforms that have been studied take the form of small perturbations of the initial tax function.…”

“…In contrast, our paper presents a more detailed analysis of a more narrow set of tax perturbations. Bierbrauer et al (2021) are mainly concerned with the political feasibility of income tax reforms in the sense that a reform is in the self-interest of a majority of taxpayers. They consider a perturbation of the tax function, which may enhance or diminish the amount of tax revenue.…”

Assessing Income Tax Perturbations

“…(Diewert, 1978;Dixit, 1975;Guesnerie, 1977). Piecemeal income tax reforms have received attention only more recently, see Golosov et al (2014), Saez (2001), Hendren (2016), Bierbrauer, Boyer and Peichl (2020). Most of the reforms that have been studied take the form of small perturbations of the initial tax function.…”