COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1637 A Positive Theory of Income Taxation Where Politicians Focus John E. Roemer February 2008 We construct an equilibrium model of party competition, in which parties are especially concerned with their core and swing voters, concerns which American political scientists have focused upon in their attempts to understand party behavior in general elections. Parties compete on a large policy space of possible income-tax policies. An element in
this infinite-dimensional space is a function which maps pre-fisc income into post-fisc
income. The only restrictions are that the function be continuous, and satisfy exogenously
specified upper and lower bounds on its derivative, where it is differentiable. Only a
fraction of each voter type will vote for each party, perhaps because of issues not
modeled here or voter misperceptions of policies. Each party's policy makers comprise two
factions, one concerned with maximizing the welfare of its constituency, or its core, the
other with winning over swing voters. An equilibrium is a pair of parties
(endogenously determined), and a pair of policies, one for each party, in which neither
party can deviate to another policy which will be assented to by both its core and swing
factions. Formally, this is a Nash equilibrium where each party possesses only a
quasi-order over the policy space. We fully characterize the equilibria. There are many.
In a specially important case, each party proposes a piece-wise linear tax schedule, and
these schedules coincide for a possibly large interval of middle-income voters, while the
left' party gives more to the poor and the ‘right’ party more to the rich. JEL Classification: D72, D31, 1130, 1120 Keywords: Political economy, Income taxation, Political equilibrium |
