Fiscal Choices and Economic Outcomes
- The Locke Institute series
Chapter 6: Fiscal Rules for a Democracy
6. Fiscal rules for a democracy The standard model of a democracy in the previous chapters assumes that the tax system is progressive and that the ﬁscal choices are made by majority rule. For this chapter this model is modiﬁed to evaluate the long-term eﬀects of a proportional tax system and a 60 percent voting rule, for democracies with a short-term ﬁscal horizon and for those with a long-term horizon. The eﬀects of these modiﬁcations are compared with those from the standard model and are presented in Table 6.1. A PROPORTIONAL TAX SYSTEM The eﬀects of a proportional income tax are estimated by setting the parameter e equal to the parameter d. The substitution of a proportional tax for a progressive tax does not change the decisive voter, but it somewhat reduces his or her demand for government spending. For democracies with either a short- or long-term ﬁscal horizon, this leads to a small reduction in the average tax rate, the level of general government spending, and the level of transfer payments. These ﬁscal choices lead to a small increase in total output, a moderate increase in average net income,1 and a moderate decline in median net income. Both average net income and median net income, as expected, are higher in a democracy with a longterm ﬁscal horizon. For those who are concerned about the redistributionist eﬀects of majoritarian democracy, however, the case for a proportional tax appears rather weak, with the increase...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.