2011 Articles

Competitive Nonlinear Taxation and Constitutional Choice

Morelli, Massimo; Yang, Huanxing; Ye, Lixin

In an economy where agents have different productivities and mobility, we compare a unified nonlinear optimal taxation with the equilibrium taxation that would be chosen by two competing tax authorities if the same economy were divided into two States. The overall level of progressivity and redistribution is unambiguously lower under competitive taxation; the "rich" are always in favor of competing authorities, whereas the "poor" are always in favor of unified taxation; the preferences of the middle class depend on the initial conditions in terms of the distribution of abilities, the relative power of the various classes, and mobility costs.