Redistributive Taxation and Public Expenditures

48 Pages Posted: 9 Apr 2008

See all articles by Sanghamitra Bandyopadhyay

Sanghamitra Bandyopadhyay

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)

Joan Maria Esteban

Autonomous University of Barcelona

Date Written: October 2007

Abstract

We introduce a model of redistributive income taxation and public expenditure. Besides redistributing personal income by means of taxes and transfers, the government supplies goods and services. The government chooses the tax schedule that is found acceptable by the largest share possible of the population. We show that there is a unique income tax schedule that is universally acceptable. The progressivity of the income tax is shown to depend on the composition of the public expenditure and on the substitutability between the goods and services supplied by the government and the consumption goods privately obtained through the market. We test the empirical implications of the model. Specifically, we use OECD data to observe the relationship between marginal tax rates and the distribution over the taxpayers of the benefits produced by the specific composition of the government expenditure in the provision of goods and services. We confirm that for lower elasticities of substitution between public and private goods, there is a negative relationship between marginal tax rates and pro-taxpayer bias, and for higher elasiticities, there is a positive relationship.

Suggested Citation

Bandyopadhyay, Sanghamitra and Esteban, Joan Maria, Redistributive Taxation and Public Expenditures (October 2007). LSE STICERD Research Paper No. 95, Available at SSRN: https://ssrn.com/abstract=1117715

Sanghamitra Bandyopadhyay (Contact Author)

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Joan Maria Esteban

Autonomous University of Barcelona ( email )

Campus UAB
E-08193 Bellaterra
Spain
34 93 580 6612 (Phone)
34 93 580 1452 (Fax)

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