The standard models with incomplete markets (e.g. Aiyagari) have difficulty justifying the current income tax rates as an optimal or political equilibrium outcome. Given the highly skewed income distribution, the majority of the population would be in favor of raising taxes to a much higher level. We show that incorporating (i) the ex-ante heterogeneity of earnings and (ii) income-dependent voting behavior helps us to reconcile the large gap between the model and data.
Bibliographical noteFunding Information:
We would like to thank Arpad Abraham and two anonymous referees for helpful comments. This work is supported by grants from the National Research Foundation of Korea funded by the Korean government (NRF-2016S1A5A2A03926178).
© 2021 Walter de Gruyter GmbH, Berlin/Boston.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics