The Politics of Flat Taxes

56 Pages Posted: 11 Jan 2015 Last revised: 10 Oct 2019

See all articles by Daniel Carroll

Daniel Carroll

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Jim Dolmas

Federal Reserve Banks - Federal Reserve Bank of Dallas

Eric R. Young

University of Virginia

Date Written: September 6, 2017

Abstract

We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors—the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting—in determining the equilibrium mix of taxes.

Keywords: Political Economy, Essential Set, Voting, Inequality, Incomplete Markets

JEL Classification: D52, D72, E62

Suggested Citation

Carroll, Daniel and Dolmas, Jim and Young, Eric R., The Politics of Flat Taxes (September 6, 2017). FRB of Cleveland Working Paper No. 14-42R, Available at SSRN: https://ssrn.com/abstract=2547618 or http://dx.doi.org/10.2139/ssrn.2547618

Daniel Carroll (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Jim Dolmas

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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