Tax compliance and income redistribution: a political competition model

Abstract

This paper analyzes the political economy of income redistribution when voters are concerned about tax compliance. We consider a two stagemodel where there is a two party competition over the tax rate in the first stage and voters decide about their level of tax compliance in the second stage. We model political competition à la Wittman with the ideology of parties endogenously determined at equilibrium. We calibrate the model for an average of EU-27 countries. Numerical simulations provide the tax rates proposed by the two parties and the level of tax compliance. We find that a decrease in confidence in tax morale, and an increase in parties’ uncertainty about the preferences of the median voter increase the probability that the party offering the lowest income tax will win and decrease tax compliance.