REPRESENTATIVE DEMOCRACY AND CAPITAL TAXATION

In this paper we study a political model of capital taxation. Voters w ho differ in their relative shares of capital and labor income choose tax policy under majority rule. We compare two political regimes: dire ct democracy, where the voters vote directly on the policy; and repres entative democracy, where they elect a representative who then chooses policy. In both regimes some form of commitment by the voters is nece ssary to avoid excessive taxation of capital. But the necessary commit ment under representative democracy corresponds closely to that provid ed by the actual institutions of most democracies.