Journal Article

Politicians, Taxes and Debt

Pierre Yared

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 77, issue 2, pages 806-840
Published in print April 2010 | ISSN: 0034-6527
Published online April 2010 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00584.x
Politicians, Taxes and Debt

Show Summary Details

Preview

The standard analysis of the efficient management of income taxes and debt assumes a benevolent government and ignores potential distortions arising from rent-seeking politicians. This paper departs from this framework by assuming that a rent-seeking politician chooses policies. If the politician chooses extractive policies, citizens throw him out of power. We analyse the efficient sustainable equilibrium. Unlike in the standard economy, temporary economic shocks generate volatile and persistent changes in taxes along the equilibrium path. This serves to optimally limit rent-seeking by the politician and to optimally generate support for the politician from the citizens. Taxes resembling those of the benevolent government are very costly since the government over-saves and resources are wasted on rents. Political distortions thus cause the complete debt market to behave as if it were incomplete. However, in contrast to an incomplete market economy, in the long run, taxes do not converge to zero, and under some conditions, they resemble taxes under a benevolent government.

Journal Article.  15304 words.  Illustrated.

Subjects: Economics

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.