Political Conflicts, the Role of Opposition Parties, and the Limits on Taxation

Abstract

In democratic systems, the rich have diverse channels to influence policies. In a model of taxation, I study the capacity of the rich to constrain the fiscal choice of a government by starting a costly political conflict (for example, a press campaign), which imposes a cost on the government and influence the fate of the government's fiscal plan. I show that the government's tax proposal depends critically on the marginal disutility of taxation for the rich. This approach provides a new rationale for the empirically documented U-shaped relationship between inequality and taxation. It also highlights a new role for opposition parties. By agreeing to bear part of the cost of a political conflict in exchange for compromise, the opposition makes Pareto-improving arrangements possible.

Keywords: taxation, opposition, coalition, inequality

JEL Classification: D72, D78, D74, H20