Issues relating to the development and implementation of tax policies are taking on increasing importance in public debate. The pressure on public finances in the wake of the health crisis reinforces the view that these issues will play a crucial role in the political debate in the years to come. We present the results of new research on reforms to income tax systems. Our approach shows that tax reforms leading to a more significant change in the tax burden – whether an increase or a decrease – for higher-income taxpayers are of particular interest. We refer to these reforms as ‘monotonic’ and show that, under this condition, it is possible to identify the ‘winners’ and ‘losers’ of a given tax reform. Furthermore, when the individual with median income is in favour of a ‘monotonic’ reform, we can conclude that it is politically feasible: at least a majority of individuals will benefit financially from it. An empirical analysis of tax reforms implemented in the United States and France reveals that, on the whole, past reforms have been ‘monotonic’. Our approach therefore allows us to test whether a given tax system permits a reform that is considered ‘politically feasible’ in our analysis.
Tax reforms and political feasibility
This study highlights that ‘monotonic’ tax reforms – reforms such as changes to individual tax burdens that are more significant for higher-income taxpayers – are of particular interest from both a theoretical and practical perspective.
Reference IPP Policy Brief No. 74
Presentation
Key Results
- When a tax reform has certain characteristics, it is possible to identify the winners and losers of that reform and to determine which subset of voters must ‘win’ for a reform to be politically feasible (in the sense that the majority of voters will benefit financially from the policy). So-called ‘monotonic’ reforms make it possible to carry out such an analysis.
- ‘Monotonic’ reforms are characterised by the fact that individuals with higher incomes experience greater changes in their tax burden. For example, this is the case for (i) reforms leading to tax cuts for all income brackets, with larger reductions for higher incomes; or (ii) reforms leading to tax increases for everyone, with larger increases for the wealthiest.
- The vast majority of tax reforms are ‘monotonic’: of the 394 income tax reforms that took place between 2000 and 2016 across a panel of 33 OECD countries, 78 per cent were ‘monotonic’ reforms ’. In France in particular, 85 per cent of income tax reforms since 1915 have been ‘monotonic’.
- The introduction of income support measures (such as the Earned Income Tax Credit in the United States or the Prime d’activité in France) is politically feasible.
- It is politically feasible to introduce larger tax cuts for higher-income earners if policymakers strive to ensure that the median voter is among the beneficiaries.
