This paper explores the politics of taxation from an explicitly allocational angle. As taxes incentivize certain behaviors and disincentivize others, they affect the allocation of time and resources in the economy. From a political perspective, the decision to tax saving or consumption, labor or capital should therefore be seen not just as the outcome of distributional struggles but also as shaped by allocational coalitions.
A focus on allocation shifts the locus of analysis away from the distributional concerns of parties and voters and onto the allocational concerns of consumers and producers, i.e. of different sectors of the economy. Producer coalitions have substantial influence on the development of tax systems and differences in tax systems are in turn closely linked to differences in growth models. An investment-enhancing tax policy is supported by the economic and political clout of investment-heavy industries, further enhances their influence, and thus pushes the country further down the road of an investment-based growth model. Similarly, a consumption-enhancing tax system is linked to a consumption-driven growth model.
The paper develops an allocational theory of tax policy choices and provides quantitative and qualitative evidence in its support.
