A Political Theory of Progressive Income Taxation

Progressivity in both marginal and average tax rates seems to be a universal phenomenon. Yet the optimal taxation literature does not, by and large, imply progressivity and most of the investigations of politically determined tax schedules deal with linear taxation.

This paper considers the determination of the tax structure by majority rule when tax schedules are characterized by three parameters and individuals differ in ability. It is shown that if the rankings of income and of ability always coincide the set of schedules preferred by the individual with median ability is contained in the set of local majority winning schedules. Under some additional restrictions this result is extended to any (global) movement along the tax possibility frontier.

The paper uses this result to demonstrate that the existence of both marginal and average progressivity of tax schedules can be explained as the outcome of a majority voting process in which the median individual is pivotal with respect to the tax schedule chosen by the political process. Marginal progressivity is more likely the stronger the right hand skewness and the larger the variance in the distribution of abilities. It is also more likely if the labor supply response to increased tax burdens of high ability individuals is smaller in absolute value than that of low ability individuals.

The paper also discusses conditions for uniqueness of the tax schedule.