Two golden rules for taxation in  political economy

    How do politicians tax in democratic societies? This is an open question which still has not found a clear answer. The normative approach, in its quest to find efficient solutions, derived several formuale which state how a benevolent government should tax. In particular, the most important achievements obtained under the optimal theory are due to Ramsey (1927) and Diamond (1975) for the indirect taxation, Diamond and Mirrlees (1971) for the direct taxation and Samuelson for the provision of public good. But what would happen if instead of considering a benevolent government which maximises a given Social Welfare Function we move from the hypothesis that political candidates choose their taxation policy in order to maximise the probability of winning elections? Do results achieved under the normative approach still hold? 

    My works using the Probabilistic Voting Theory suggest that the answer is no, because the political competition entails a political failure according to which politicians fail to set optimal taxation policies because they must satisfy the  most powerful groups in order to win elections. What motivated me when I wrote my papers was to find some "golden rules" which could represent an equivalent for the political economy to the optimal golden rules found by the optimal taxation. Here I present the two formulae I found, one for the indirect and the other for direct taxation. These formulae suggest that tax rates are set by candidates according to the size and the density (a proxy for the political power) of social groups. The weights given by candidates to individual is no longer based on the preference of society for inequality (high weights for the poor and low weights for the rich) but on the power of the group. If this power is concentrated amongst richest individuals, taxation loses its distributive role and it becomes a harmful way in the Government hands to obtain the power.

    My golden rule for Indirect taxation

* For details and the legend of symbols please read my paper "A Contribution to the Positive Theory of Indirect Taxation"

    My golden rule for Direct taxation

* For details and the legend of symbols please read my paper "A Contribution to the Positive Theory of Direct Taxation"