Seminario 23/05 – Vicente Calabuig (U. de Valencia) – Elites, Inequality and the Emergence and Erosion of Progressive Taxation

Información

Abstract

This paper theoretically explores the role of elites in the rise of progressive taxation in Western countries at the beginning of the XXth century and in its posterior erosion in the last four decades. We focus on its interaction with the level of inequality between the elite and the citizens. We analyse a stylized political economy dynamic model where a (wealthy) elite makes a decision on the taxes to be paid by non-elite (poorer) citizens and by themselves. A fraction of citizens are fiscal-reciprocators: they experience positive (negative) reciprocity under a progressive (regressive) tax system. This proportion of citizens evolves over time according to their relative payoff compared to materialist citizens. We show that the choice of tax structure depends on the value for the elite of the public good generated by tax revenues, the proportion of fiscal-reciprocal citizens and on the level of inequality between elite and citizens incomes. Our results show a dynamic complementarity between the level of reciprocity in the society and tax progressivity. Indeed, this complementarity only operates if inequality is sufficiently low. In this case a progressive tax culture will be achieved, otherwise a regressive tax culture will prevail.