Income Taxation, Political Accountability and the Provision of Public Goods .

Abstract

Using an agency-voting model and considering a general tax schedule (linear and non-linear), we analyze whether an increment in taxes (understood as an increment in the marginal income tax rates, or, alternatively, in tax progressivity) positively affects voters' political demands and, consequently, incumbent's effort and the provision of public goods (PG). We find that only under some particular circumstances this outcome can be observed. We characterize the conditions under which an increment in taxes positively affects voters' demands and show that, although increments in these demands are always useful to foster the incumbent's performance, this is not enough to guarantee an increment in the provision of PG and the incumbent's effort. Contingent to observe an increment in voter's demands, the provision of PG increases if either pivotal voter's disposable income is negatively affected by the increment in taxes, or, if this is positively affected, its increment is small enough. Contingent to observe an increment in the provision of PG, the rents extracted by the incumbent (as proportion of tax revenues) decrease if the increment in PG spending is larger than the change in those tax revenues not extracted by the incumbent.