The Dynamics of Policy Formation: Income Tax Rates in Israel,1948–1975

In this paper, an attempt is made to show the importance of incorporating ‘politics’ into tax designs. Models of optimal taxation generally offer limited policy-relevant guidance, since they either ignore politics altogether or make wrong assumptions concerning goals and rules of the game. One such common error is the assumption that governments attempt to promote ‘equity’. A case study of changes in the top marginal rate of income tax in Israel demonstrates how goals, values, constraints, and opportunities shape the definition of policy problems and the solutions that are eventually chosen.