Positive Studies of Income Taxation

Gould, Eric D., and Esteban F. Klor. Forthcoming. “Party Hacks and True Believers: The Effect of Party Affiliation on Political Preferences”. Journal of Comparative Economics.Abstract

This paper examines the effect of party affiliation on an individual’s political views.  To do this, we exploit the party realignment that occurred in the U.S. due to abortion becoming a more prominent and highly partisan issue over time.  We show that abortion was not a highly partisan issue in 1982, but a person’s abortion views in 1982 led many to switch parties over time as the two main parties diverged in their stances on this issue.  We find that voting for a given political party in 1996, due to the individual’s initial views on abortion in 1982, has a substantial effect on a person’s political, social, and economic attitudes in 1997.  These findings are stronger for highly partisan political issues, and are robust to controlling for a host of personal views and characteristics in 1982 and 1997.  As individuals realigned their party affiliation in accordance with their initial abortion views, their other political views followed suit.

Ben-Bassat, Avi, Momi Dahan, and Esteban F Klor. 2016. “Is Centralization a Solution to the Soft Budget Constraint Problem?”. European Journal of Political Economy 45 (1) : 57-75.Abstract

This paper focuses on the centralization program implemented in Israel in 2004 to analyze whether the administrative subordination of municipalities is an effective policy to deal with problems related to soft-budget constraint of lower level governments.  The results consistently show, for different specifications and samples of municipalities, that this program brought a substantial decrease of municipalities’ expenditures (mostly because of decreases on salary payments), and an increase of local property tax collection.  Our analysis shows that all of the fiscal impact of the program is due to the appointment of an accountant that reports directly to the central government, a relatively mild form of administrative subordination.  In contrast, more intrusive forms of subordination, like the central imposition of a recovery program, do not result in any substantial improvement of municipalities’ fiscal situation.  This leads us to conclude that a mild form of administrative subordination is an effective tool to cope with problems related to soft-budget constraints, whereas political subordination is not an effective tool to reach that goal.

Klor, Esteban F, and Moses Shayo. 2010. “Social Identity and Preferences over Redistribution”. Journal of Public Economics 94 (3-4) : 269-278.Abstract

We design an experiment to study the effects of social identity on preferences over redistribution. The experiment highlights the trade-off between social identity concerns and maximization of monetary payoffs. Subjects belonging to two distinct natural groups are randomly assigned gross incomes and vote over alternative redistributive tax regimes, where the regime is chosen by majority rule. We find that a significant subset of the subjects systematically deviate from monetary payoff maximisation towards the tax rate that benefits their group when the monetary cost of doing so is not too high. These deviations cannot be explained by efficiency concerns, inequality aversion, reciprocity, social learning or conformity. Finally, we show that behavior in the lab helps explain the relationship between reported income and stated preferences over redistribution observed in survey data.

Klor, Esteban F. 2006. “A Positive Model of Overlapping Income Taxation in a Federation of States”. Journal of Public Economics 90 (4-5) : 703-723.Abstract

This paper develops a positive theory of overlapping income taxation in a federation of states. The analysis provides a complete characterization of the equilibrium federal and states tax rates as functions of the level of total productivity dispersion between the states. The federal rate is increasing in the level of total productivity dispersion between the states, even if the income of the decisive voter at the federal level is above the mean income. Given that the individuals’ income is endogenously determined there exists a negative trade-off between the implemented federal tax rate and the resulting states’ tax rates, regardless of the pre-tax income of the decisive voter at the state level. Thus, high levels of productivity dispersion between the states cause a higher than optimal federal tax rate together with low states’ tax rates. It is also shown that a system of overlapping income taxation is not efficient. The resulting inefficiency might be exacerbated by the implementation of a federal matching grants program, contradicting previous results in the related normative literature.

Klor, Esteban F. 2003. “On the Popular Support for Progressive Taxation”. Journal of Public Economic Theory 5 (4) : 593-604.Abstract

This paper develops a political economy model that is consistent with the fact that  democracies have a preference for increasing marginal tax rates on income. We present a model in which there is an exogenous set of political parties with preferences over the set of admissible tax schedules. This set contains virtually any increasing and piecewise linear continuous function. Each party decides whether or not to present a candidate for election. There is a fixed cost of running. The elected candidate implements one of her preferred tax policies. Our main results provide conditions under which a Strong Nash Equilibrium exists, and a tax schedule with increasing marginal tax rates is implemented in some Nash Equilibria and in any Strong Nash Equilibrium.

Carbonell-Nicolau, Oriol, and Esteban F Klor. 2003. “Representative Democracy and Marginal Rate Progressive Income Taxation”. Journal of Public Economics 87 (87) : 5-6.Abstract

This paper develops a political economy model that is consistent with the fact that democracies have a preference for increasing marginal tax rates on income. We present a model in which there is an exogenous set of political parties with preferences over the set of admissible tax schedules. This set contains virtually any increasing and piecewise linear continuous function. Each party decides whether or not to present a candidate for election. There is a fixed cost of running. The elected candidate implements one of her preferred tax policies. Our main results provide conditions under which a Strong Nash Equilibrium exists, and a tax schedule with increasing marginal tax rates is implemented in some Nash Equilibria and in any Strong Nash Equilibrium.