Tax Differentiation, Lobbying, and Welfare

What degree of tax autonomy should be granted to a taxing authority? Although the policy maker aims at maximizing social welfare, her tax policy may be distorted by the lobbying activity of taxpayers. In this political environment we characterize the conditions under which social welfare can be increased by restricting the set of tax instruments available to the policy maker, i.e. the degree of tax autonomy. We show that full tax autonomy is more costly, in terms both of welfare distortions and lobbying effort, when the lobbies are asymmetric in size, while minimal tax autonomy is more costly when the tax bases are asymmetric across different groups.