The Democratic Political Economy of Progressive Income Taxation

Abstract:     
Why do both left and right political parties almost always propose progressive income taxation schemes in political competition? Analysis of this problem has been hindered by the two-dimensionality of the issue space. To give parties a choice over a domain which contains both progressive and regressive policies requires an issue space that is at least two-dimensional. Nash equilibrium between two parties with (complete) preferences over two-dimensional policies fails to exist. I introduce a new equilibrium concept for political games, based on inner-party struggle. A party consists of three factions--reformists, militants, and opportunists: each faction has a complete preference order on policy space, but together they can only agree on a partial order. Inner-party unity equilibrium is defined as Nash equilibrium between two parties, each of which maximizes with respect to its quasi- order. Such equilibria exist in the two-dimensional model, and in them both parties propose progressive income taxation.

JEL Classification: D72, H20

working papers series