Electoral Systems, Legislative Process and Income Taxation

Abstract

We examine the effects that political institutions, i.e. electoral systems and legislative processes, have on income taxation and public good allocation. We characterize the equilibrium income tax schedules and the optimality conditions under two types of political institutions, a two party plurality system with a single district, and one with multiple districts where the tax policy is determined through a legislature. It is shown that the exogenous social welfare functions in the optimal taxation literature can be endogenouusly determined by explicitly modelling the political institutions, which put different welfare weights on different subsets of the population.