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Tax Reforms: Balancing Optimization and Feasibility

Tax Reforms: Balancing Optimization and Feasibility
12 Nov. 2020

The design of redistributive tax policies is a recurring topic in public discourse. Who to tax, who to support? Economic theories on optimal taxation have been established, notably thanks to the contribution of the 1996 Nobel Prize winner in economics James Mirrlees. However, these theories do not consider the social acceptability of these taxes, and thus their political feasibility. This is a lack that Pierre Boyer, Professor at the École Polytechnique within the Center for Research in Economics and Statistics (CREST*), aims to fill through his project "Tax reforms and revolts in democracies" (TAXREV). This project has been selected by the "Young Researchers" 2020 program of the French National Research Agency (ANR).

Recurring issues

Should high-income households be taxed more heavily? Should low-income households be supported by means of earnings subsidies such as the Earned Income Tax Credit in the United States or the Prime d'activité in France? What tax rate should the middle-class face?

While normative analyses on these questions have led to a well-developed "theory of optimal taxation" following the seminal contribution by Nobel laureate James Mirrlees, the political economy counterpart remains a work-in-progress.  As a consequence, we lack a systematic understanding of the tension between the tax systems that are optimal and those that are politically feasible.

A new framework

The research in this research grant ANR develops a conceptual framework to analyze “Tax reforms and revolts in democracies”. It delivers a theory that consider an essential constraint that emerges in a democracy: tax policies have to find sufficient political support, and this has implications for the design of tax systems. The gilets jaunes manifestations are a reminder that important mobilizations can led to cancellation of announced tax reforms.

Anticipating future reforms

The current coronavirus crisis will put unprecedented pressure on public finances. Increasing revenues will be a priority once the virus has receded, and issues of political feasibility and equity will be crucial.

Indeed, tax systems have been redesigned after major events such as World Wars and our ability to take these constraints into account will be severely tested. Revolts could occur if tax reforms are not perceived as meeting political and equity constraints.

The approach taken in “Tax reforms and revolts in democracies” will open new directions to practitioners and scholars in social sciences, both theoretically and empirically. It allows to identify reforms that are appealing from a social welfare perspective and, moreover, are politically feasible.

About the ANR Young Researchers program

The aim of the "Young Researchers" program is to support the projects of young researchers or professors, to enable them to develop their own subject independently and to give them the opportunity to rapidly express their capacity for exploratory research and innovation. Projects are selected on the basis of originality and novelty in relation to the research axes of the laboratory to which the coordinator belongs.

* CREST: a joint research unit CNRS - École Polytechnique / Institut Polytechnique de Paris - ENSAE Paris / Institut Polytechnique de Paris