Authors : Felix Bierbrauer*, Pierre C. Boyer*, Andrew Lonsdale, Andreas Peichl*
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*Authors of the reference study
Questions linked to the design and implementation of redistributive tax policies have occupied a growing position on the public agenda over recent years. Moreover, the fiscal pressures brought upon by the current coronavirus crisis will ensure that these issues maintain considerable political significance for years to come. In light of this importance, we present novel research on reforms of income tax systems. Our approach shows that tax reforms wherein the changes in individual tax burdens are larger for taxpayers with higher incomes are of particular interest. We denote such reforms as “monotonic” and show that, under this condition, it is possible to determine the “winners” and “losers” of a given tax reform. One can then conclude whether the monotonic reform is politically feasible, depending on whether a majority of individuals will benefit financially from the policy. An empirical analysis of tax reforms with a focus on the United States and France reveals that past reforms have, by and large, been monotonic. Our approach therefore enables us to test whether a given tax system admits a politically feasible reform and has direct policy relevance for the common types of taxation reforms undertaken by government authorities.
- Identifying the winners and losers of a tax reform and determining which subset of voters must “win” for a reform to be politically feasible (in the sense that a majority of voters will benefit financially from the policy) is possible when reforms are “monotonic”.
- Monotonic reforms are such that individuals with higher incomes experience larger changes in their tax burdens. Examples include: (i) a reform that involves tax cuts for all incomes, with larger cuts for larger incomes; and (ii) a reform that involves higher taxes for everyone, with increases that are larger for the rich.
- In practice, the vast majority of tax reforms are monotonic: among the 394 income tax reforms that took place from 2000-2016 in a panel of 33 OECD countries, 78% were monotonic reforms. In France in particular, 85% of income tax reforms since 1915 have been monotonic.
- The expansion of earnings subsidies schemes (such as the Earned Income Tax Credit in the United States or the Prime d’activité in France) is politically feasible.
- Tax cuts that are larger for individuals with higher incomes can be politically feasible if policy-makers work to include the median voter among their beneficiaries.