Capital Taxation under Political Constraints.

This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough coalition of citizens supports reform; thus, sustainable policies are those that will continue to attract enough political support in the future. We find that optimal marginal capital taxes are either progressive or U- shaped, so that savings are subsidized for the poor and/or the middle class but are taxed for the rich. U- shaped capital taxes always emerge when individuals' political behavior is purely determined by economic motives. [ABSTRACT FROM AUTHOR]

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