On the Political Economics of Tax Reforms
Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR)
Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management
CEPR Discussion Paper No. DP8507
There is often a gap between the prescriptions of an optimal tax system and actual tax systems, some of which can be neither efficient economically nor efficient at redistributing income. With a focus on personal income taxes, this paper reviews the political economics literature on tax systems and reforms to see whether political mechanisms allow us to better understand why tax systems look the way they look. Finally, we exploit a database of reforms in labour taxation in the European Union to check the determinants of all reforms, on the one hand, and of targeted reforms, on the other hand. The results fit well with political economy theories and show that political variables carry more weight in triggering reforms than economic variables. This shed light on whether and how tax reforms are achievable. It also explains why many reforms that seem economically optimal fail to be implemented.
Number of Pages in PDF File: 52
Keywords: personal income tax, political economy, taxation
JEL Classification: H11, H21, H24, P16working papers series
Date posted: August 12, 2011
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