Abstract - This paper explores the contribution that public choice models can make to the traditional efficiency and distributional analyses of tax policy. It notes the relative lack of attention to political economy issues in public finance, at least in comparison with other policy-oriented subfields in economics. It then discusses two key insights that emerge from public choice models of taxation. The first is the notion that different tax systems may be associated with different opportunities for political rent seeking, and the second is the possibility that actual tax systems equate the marginal political cost of raising revenue from different tax instruments, rather than the marginal efficiency cost. The paper concludes with a brief discussion of the role of traditional efficiency and distributional analyses in contributing to tax policymaking, even in a political world.

Most applied tax policy research addresses the efficiency costs of different tax rules, the behavioral effects of taxation, or the distribution of gains and losses associated with a switch from one tax policy to another. There is usually little accompanying discussion of how and why various tax policies are adopted. While most researchers would readily admit that political factors are a fundamental determinant of the tax system, and some with policymaking experience might say “it's all politics,” the implications of this insight receive relatively little attention.