CE41 - Inégalités, discriminations, migrations

Tax reforms and tax revolts in democracies – TAXREV

Tax reforms: Finding the balance between efficiency and political feasibility

Questions linked to the design and implementation of redistributive tax policies have occupied a growing position on the public agenda over recent years. Moreover, the fiscal pressures brought upon by the current coronavirus crisis will ensure that these issues maintain considerable political significance for years to come.

New design of redistributive tax policies

The design of redistributive tax policies is an evergreen in the public discourse. Research on these questions has led to a well-developed “theory of optimal taxation” with seminal contributions by Mirrlees (1971), Piketty (1997), Diamond (1998) and Saez (2001; 2002). These contributions have in common that they characterize an optimal tax system that takes account of the behavioral responses of taxpayers and the public sector's budget constraint. This theory is institution-free, which is both a strength and a weakness. It is a strength as it delivers clarity on how incentive effects shape welfare-maximizing taxes. It is a weakness because incentive effects are not the only forces that are relevant for the design of tax policies.<br />The research in this proposal develops a conceptual framework to analyze “Tax reforms and revolts in democracies”. It delivers a theory that takes account of an essential constraint that emerges in a democracy: tax policies have to find sufficient political support (i.e. being politically feasible) and this has implications for the design of tax systems (see, e.g., Martin and Gabay, 2018; Passarelli and Tabellini, 2017). The gilets jaunes manifestations are a reminder that important mobilizations can led to cancellation of announced tax reforms (see, Boyer et al. (2020a) for a descriptive and geographical analysis of the determinants of the movement). The current coronavirus crisis will put an unprecedented pressure on public finances. Raising revenues will be a priority once the virus recedes and political feasibility and fairness issues 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 (see Scheve and Stasavage, 2016). Revolts could occur if tax reforms are not perceived to be satisfying fairness and political constraints (on fiscal revolts after the World War I see, e.g., Delalande, 2009). <br /><br />The approach in “Tax reforms and revolts in democracies” will open new directions to 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.

Key contributions of this research project include:
1. A notion of constrained efficiency according to which a tax system is constrained efficient if all politically feasible welfare improvements have been realized.
2. A method for checking whether observed tax policies actually are constrained efficient.
3. A method for identifying the winners and losers of tax reforms that does not involve an interpersonal comparison of utilities.
4. Empirical analyses of tax reforms that have been taking place in the past and that could be proposed to see whether those reforms have led to the realization of politically feasible welfare-improvements.

We present novel research on reforms of income tax systems. Our approach shows that tax reforms wherein the changes in individual tax burdens are larger for taxpayers with higher incomes are of particular interest. We denote such reforms as “monotonic” and show that, under this condition, it is possible to determine the “winners” and “losers” of a given tax reform. One can then conclude whether the monotonic reform is politically feasible, depending on whether a majority of individuals will benefit financially from the policy. An empirical analysis of tax reforms with a focus on the United States and France reveals that past reforms have, by and large, been monotonic. Our approach therefore enables us to test whether a given tax system admits a politically feasible reform and has direct policy relevance for the common types of taxation reforms undertaken by government authorities.

The current coronavirus crisis will put an unprecedented pressure on public finances. Raising revenues will be a priority once the virus recedes, and political feasibility and fairness issues will be crucial to avoid fiscal revolts as in the French Yellow Vests protests. Tax systems have often been redesigned after major historical events and our ability to take these requirements into account moving forward will be severely tested. The research outlined in this project has identified an unambiguous capacity for politically feasible expansions of earnings subsidy programs in the United States and France, with a less clear-cut scope for changes to top marginal tax rates in these countries.

“Politically feasible reforms of non-linear tax systems” (Felix Bierbrauer, Pierre Boyer and Andreas Peichl), 2021. American Economic Review, 111 (1): 153-91.

„Tax reforms and tax revolts in democracies“ proposes a new conceptual framework for the analysis of tax reforms. It develops a notion of constrained efficiency that takes political economy forces into account. A tax system is constrained efficient if there is no welfare-improving reform that is politically feasible. Our theory will allow this political feasibility to take several forms from the constraint that the reform is making a majority of the population better off to the constraint that no revolt occurs once the reform is enacted. We use these insights to develop a diagnosis system that makes it possible to check whether a given status quo in tax policy admits reforms that are welfare-improving and/or politically feasible. This diagnosis system is based on sufficient statistics and relies on data on income distributions and on estimates of the behavioural responses to taxation (including revolts). Our analysis will broaden our understanding of tax reforms in modern democracies.

Project coordination

Pierre Boyer (Centre de Recherche en Economie et Stastistique - CREST)

The author of this summary is the project coordinator, who is responsible for the content of this summary. The ANR declines any responsibility as for its contents.


CREST Centre de Recherche en Economie et Stastistique - CREST

Help of the ANR 299,160 euros
Beginning and duration of the scientific project: - 48 Months

Useful links

Explorez notre base de projets financés



ANR makes available its datasets on funded projects, click here to find more.

Sign up for the latest news:
Subscribe to our newsletter