Majority Voting, Progressive Taxation, and Income Inequality

ABSTRACT

A challenge for the political economy literature is why the average tax rate becomes less progressive while wage inequality increases with the skill premium. This paper contributes to the literature by developing a majority voting equilibrium model in which households choose their most preferred tax schedule under increasing inequality. We find that majority voting favors a marginal tax rate to fund transfers, where the average tax rate increases with income, when the median skill level lies below the mean skill level. The average tax rate becomes less progressive when required government revenue relative to mean skill increases. These findings reconcile the literature with recent empirical trends and are robust to relaxing the assumptions of exogenous government spending and endogenous labor supply.

KEYWORDS:

• Voting
• inequality
• taxation
• government spending

JEL CODES:

• D31
• D72
• H24
• H31
• H53

Acknowledgements

The helpful comments and suggestions of two anonymous referees are gratefully acknowledged.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1 In the United States, the top marginal tax rate on personal income was 70 per cent in 1979, declined to 28 per cent in 1988, increased to 39.6 per cent in 1993, fell to 35 per cent in 2003 and has been at 37 per cent as of 2018 (US Department of the Treasury 2021).

2 See Pressman (2016) for an overview of symposium issue papers on Piketty (2014) from a post-Keynesian perspective.

3 While the substitution of ‘leisure’ for paid work is conceivable for high skill households, an explanation for the left side of the skill distribution would consider the type of welfare system in place. Households may reduce disposable income by choosing to ‘stay at home’ and avoid work-related transport costs, child-care, and risk of infection for instance in the Covid-19 pandemic. The threshold above which households can choose to reduce paid work could be very high for households in countries without a developed welfare system.