Political economy of taxation

Although preferred means of taxation have changed over time, governments have always had a variety of tax instruments at their disposal. The modern literature often refers to broad classes of instruments, such as direct or indirect levies, but it also contains a large amount of descriptive material on particular types of taxes, such as those on personal or corporate income. Nor is it always clear what should be called a tax and whether the term should be defined so as to include phenomena such as the deliberate debasement of the currency practiced from time to time by autocratic rulers and democratic governments. History suggests, however, that the choice of and among tax instruments has always been largely a political decision, although economic factors will usually be taken into account. We define the term “political economy of taxation” with reference to the study of such decisions. We focus on that part of the vast literature that tries to explain how fiscal systems and instruments are chosen in a political and institutional context. At the same time, important topics, such as the relation of war to taxation, are also highlighted, even though the relevant literature may not always have a strongly analytical character. We direct not only to the purely economic analysis of taxation, which still makes up the primary body of the tax literature published by economists, and topics such as tax incidence and excess burden are not dealt with in detail. The focus on the choice of policy instruments under various political and institutional arrangements is made possible by a nascent literature that creates a direct link between collective choice models and the composition of public revenues in democratic countries. Some of these attempts can furthermore be generalized to nondemocratic regimes, and work can be tested empirically in both contexts. The new direction in the field holds great promise, since it allows researchers to link theory and empirical tests in a concrete manner and to give political fiscal analysis a firm foundation