A Politico-Economic Model of Public Expenditure and Income Taxation

We model the political process as consisting of voting on the issue considered salient, public expenditure, with a subsequent consensus over size of government and income taxation. We prove that for each majoritarian choice there is a unique consensus policy on progressivity and government size. We empirically validate the implication that the sign of the relationship between inequality and progressivity chosen by the median voter is conditional on the degree of substitutability between government and market supplied goods. We also obtain that this substitutability has a negative impact on the negative marginal effect of inequality on the size of government. JEL-Classification: H23, H50, 050. Key-words: Government Policy, Income Taxation, Public Expenditure. Esteban and Mayoral research has been funded by the Generalitat de Catalunya and the CICYT (ECO2011-25293). Useful comments by Jordi Caballe, Eliana la Ferrara and Kalle Moene are gratefully acknowledged. Andrew Gianou has provided us with a highly competent research assistance. Esteban: Institut d’Anàlisi Económica, CSIC, and Barcelona GSE; [email protected]. Mayoral: Institut d’Anàlisi Económica, CSIC and Barcelona GSE; [email protected].