Political Economy of Taxation and Growth with a Taste for Status
47 Pages Posted: 13 Dec 2012
Date Written: December 12, 2012
This paper investigates the political economy of taxation and growth in a model in which individuals have preference for high levels of relative consumption. A pivotal voter determines the equilibrium tax on capital, the revenues from which fund the provision of productive public goods. The taste for status and the distributions of wealth and political power interact to generate stylized versions of oligarchies, middle class democracies and populist democracies. An rise in the taste for status increases the role of distributional concerns in determining the equilibrium tax, lowering growth in an oligarchy or populist democracy but increasing it in a middle class democracy. In addition, starting as an oligarchy, the egalitarian redistribution of wealth or political power causes growth to first rise and then fall as the equilibrium tax rate approaches and then exceeds it growth maximizing level. While earlier work has investigated the normative implications of status preferences for tax policy, this is the first paper to develop a positive theory of taxation and growth in the presence of status preferences.
Keywords: Social Status, Relative Income Preferences, Political Economy, Growth, Democracy, Inequality, Taxation
JEL Classification: O1, P116, Z1
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