Majority voting and the welfare implications of tax avoidance

A benchmark result in the political economy of taxation is that majority voting over a linear income tax schedule will result in an inefficiently high tax rate whenever the median voter has a below-average income. The present paper examines the role of tax avoidance for this welfare result. For a right-skewed distribution of taxed income, we show that the political distortion from majority voting is increasing in the median voter's avoidance. Vice versa, keeping the decisive voter's avoidance constant, the political inefficiency is decreasing in the average level of avoidance in the economy.

► This paper examines the role of tax avoidance for the welfare assessment of majority voting over a linear income tax schedule. ► For a right-skewed distribution of taxed income, the political distortion from majority voting is increasing in the median voter's avoidance. ► Keeping the decisive voter's avoidance constant, the inefficiency is decreasing in the average level of avoidance in the economy. ► The findings generalize to other behavioral responses to taxation, including the choice of leisure.