Electoral competition, tax design and the tradeoff between redistribution and efficiency

This paper analyzes a political economy model of taxation in which political parties design the provision of a public good and the structure of a commodity tax system to maximize votes in the election. In this economy the individuals' vote choice is determined by parties' policies and voters' partisan preferences. In our model, voters partisan preferences are a form of political heterogeneity that helps to explain the votes distribution in the election and influences partie' fiscal policy design. It also predicts that left parties have a purely electoral incentive to propose a commodity tax system in which income redistribution plays a more prominent role than efficiency in guiding the design of the tax structure and public spending is high. In contrast, right parties have an electoral incentive to weigh less heavily redistribution in tax design and spending is lower compared with the provision of the public good under administrations ruled by left parties. These predictions explain stylized facts suggesting that left (right) parties tend to implement more (less) progressive tax systems. Our paper also contributes to the literature of taxation by providing a new set of empirically verifiable propositions on the role of electoral competition on the government s design of a tax structure.