This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough coalition of citizens supports reform; thus, sustainable policies are those that will continue to attract enough political support in the future. We find that optimal marginal capital taxes are either progressive or U-shaped, so that savings are subsidized for the poor and/or the middle class but are taxed for the rich. U-shaped capital taxes always emerge when individuals' political behavior is purely determined by economic motives. (JEL D12, D14, D31, D72, H21, H25)

We develop a framework for optimal taxation when agents can earn their income both in traditional activities, where private and social products coincide, and in rent-seeking activities, where private returns exceed social returns either because they involve the capture of pre-existing rents or because they reduce the returns to traditional work. We characterize Pareto optimal income taxes that do not condition on how much of an individual's income is earned in each of the two activities. These optimal taxes feature an externality-corrective term, the magnitude of which depends both on the Pigouvian correction that would obtain if rent-seeking incomes could be perfectly targeted and on the relative impact of rent-seeking externalities on the private returns to traditional and to rent-seeking activities. If rent-seeking externalities primarily affect other rent-seekers, for example, the optimal correction lies strictly below the Pigouvian correction. A calibrated model indicates that the gap between the Pigouvian and optimal correction can be quantitatively important. Our results thus point to a hefty informational requirement for correcting rent-seeking externalities through the income tax code.