THE POLITICAL-ECONOMY OF ENDOGENOUS TAXATION AND REDISTRIBUTION

This paper examines a simple dynamic model in which agents vote over c apital income taxation and redistributive transfers. We show that in e quilibrium the typical agent's preferences over the tax rate are singl e-peaked and derive a closed-form solution for the majority-rule tax r ate. We also show that high levels of initial wealth inequality can pl ace the economy on the 'wrong side of the Laffer curve'. (C) 1997 Else vier Science S.A.