Repeated Electoral Competition over Non-Linear Income Tax Schedules

38 Pages Posted: 18 Dec 2008

See all articles by Georges Casamatta

Georges Casamatta

Toulouse School of Economics (GREMAQ-CNRS); Centre for Economic Policy Research (CEPR)

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Philippe De Donder

CNRS, Toulouse School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2008

Abstract

We consider a repeated electoral competition game between two parties, each representing a constituent with a given income level. Parties are unable to commit to any policy before the election; they choose a non-linear income tax schedule once elected. In each period, citizens cast a vote either for the incumbent or for the challenger. We first show that there exist (pure strategy) subgame perfect equilibria where both parties choose the most-preferred tax schedule of their constituent, subject to the constraint that they are reelected. We characterize a specific class of these BPR (Best Policy with Reelection) equilibria in which one of the parties plays its constituent's unconstrained optimal tax function. Equilibrium tax schedules are always piecewise linear. Depending on the income levels of the two parties' constituents, we obtain either classical left-vs-right equilibria (where poorer people vote for one party and richer people for the other one) or ends-against-the-middle equilibria (where both poor and rich people vote for one party while the middle class vote for the other party). In both types of equilibria both parties propose the same tax schedule to a subset of the population.

Keywords: ends-against-the-middle, no commitment, piecewise linear income tax, Postelection politics

JEL Classification: D72, H24

Suggested Citation

Casamatta, Georges and Cremer, Helmuth and De Donder, Philippe, Repeated Electoral Competition over Non-Linear Income Tax Schedules (November 2008). CEPR Discussion Paper No. DP7054. Available at SSRN: https://ssrn.com/abstract=1311178

Georges Casamatta (Contact Author)

Toulouse School of Economics (GREMAQ-CNRS) ( email )

Manufacture des Tabacs (bât. F)
21 Allee de Brienne
31000 Toulouse
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Philippe De Donder

CNRS, Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

HOME PAGE: http://https://www.tse-fr.eu/people/philippe-de-donder

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