Capital income taxation under majority voting with aging population

Assaf Razin*, Efraim Sadka, Phillip Swagel

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

An old person typically has a mixed attitude toward the welfare-state benefits, when they are financed by capital taxes, because her income derives mostly from capital. We develop a majority-voting model which focuses on the effect of aging on this dilemma. Surprisingly, the theory predicts that tax rates on capital income could actually rise as the population ages, even though older individuals would be expected to own more capital than the young and thus vote against higher taxes. We then confront the key prediction of the model with panel data for ten European Union countries, over the period 1970-1996. We investigate the asymmetric effect of aging on the taxation of capital and labor. The implications of the model are shown to be consistent with panel data.

Original languageEnglish
Pages (from-to)476-495
Number of pages20
JournalReview of World Economics
Volume140
Issue number3
DOIs
StatePublished - 2004

Keywords

  • Dependency ratio
  • Majority voting
  • Old versus young
  • Skilled and unskilled

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