Mayoral, LauraEsteban, Joan2021-04-072021-04-072019Mayoral L, Esteban J. A politico-economic model of public expenditure and income taxation. SERIEs. 2019 Jul 17;10:479-507. DOI: 10.1007/s13209-019-0198-41869-4187http://hdl.handle.net/10230/47035This paper contributes to the literature on majority voting over fiscal policies. We depart from the standard model in two dimensions. First, besides redistributing income, the government uses the net tax revenue to finance the provision of goods and services that become in-kind transfers to the citizens. By deciding on the composition of this expenditure (education, health, law-and-order, etc.), the government chooses the allocation of the benefits to the different income segments. This choice is a fundamental ingredient of fiscal policy. Second, we tackle the problem of choosing the income tax function and the composition of public expenditure by assuming that the political process selects one of these issues as the salient one. Political controversy and vote focus on this issue exclusively. The other dimension is determined in a way so as to minimize objections (obtain consensus) among the voters. We analyze the case where the salient policy is the composition of public expenditure. We show that for each voted expenditure policy, there is a unique income tax function that attains consensus. The political process we model yields that the progressiveness of the income tax schedule depends on income inequality interacted with the elasticity of substitution of the goods provided in the market and those publicly provided. This relationship is confirmed in our empirical test.application/pdfengThis article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.info:eu-repo/semantics/articlehttp://dx.doi.org/10.1007/s13209-019-0198-4Government policyIncome taxationInequalityPublic expenditureSize of governmentinfo:eu-repo/semantics/openAccess