Minimum wage or negative income tax: why skilled workers may favor wage rigidities

In this article, we analyze the political choice of the extent and means of income redistribution between high and low-skilled workers. Redistributive tools encompass both fiscal transfers (a negative income tax) and a minimum wage requirement. We assume the use of fiscal instruments alone to be the first-best means of redistribution. We show that high-skilled workers may favor a second-best, minimum wage requirement because it increases unemployment, hence raising the marginal cost of redistribution, and creates a justification for them to moderate low-skilled workers’ claim for redistribution.      

The limitations of decentralized world redistribution: An optimal taxation approach

A centralized scheme of world redistribution that maximizes a border-neutral social welfare function, subject to the disincentive effects it would create, generates a drastic reduction in world consumption inequality, dropping the Gini coefficient from 0.69 to 0.25. In contrast, an optimal decentralized (i.e., with no cross-country transfers) redistribution has a miniscule effect on world income inequality. Thus, the traditional public finance concern about the excess burden of redistribution cannot explain why there is so little world redistribution.Actual foreign aid is vastly lower than the transfers under the simulated world income tax, suggesting that voluntary world transfers - subject to a free-rider problem - produces an outcome that is consistent with rich countries such as the United States either placing a much lower value on the welfare of foreigners, or else expecting that a very significant fraction of cross-border transfers is wasted. The product of the welfare weight and one minus the share of transfers that are wasted constitutes the implicit weight that the United States assigns to foreigners. We calculate that value to be as low as 1/2000 of the value put on the welfare of an American, suggesting that U.S. policy is consistent with social preferences that place essentially no value on the welfare of the citizens of the poorest countries, or that implicitly assumes that essentially all transfers are wasted.     

Maximizing social welfare in congestion games via redistribution

It is well known that efficient use of congestible resources can be achieved via marginal pricing; however, payments collected from the agents generate a budget surplus, which reduces social welfare. We show that an asymptotically first-best solution in the number of agents can be achieved by the appropriate redistribution of the budget surplus back to the agents.     

Optimal taxation in a stochastic economy: A Cobb–Douglas example

Optimal linear and two-piece linear taxes are calculated in two-period economies in which individuals face uncertainty about their ability to work in the second period. These second-best insurance/redistribution programs are compared with first-best economies, equilibria without government intervention, and analogous determinate economies having the same ex post production possibilities. The calculations point out ways in which economies with individual uncertainty differ from those without it.     

Pigouvian Taxes in General Equilibrium with a Fixed Tax Redistribution Rule

This paper establishes existence of a first-best emission tax in a general equilibrium model with pollution, when the redistribution rule of the tax income is chosen fixed and independently of the Pigouvian tax rate. It is known that under standard convexity assumptions each Pareto efficient allocation can be implemented by simultaneously choosing a Pigouvian tax rate and an appropriate lump sum redistribution of income. In real politics, however, tax redistribution schemes are often restricted to a small feasible set. Nonetheless we show that for any given lump sum redistribution rule, being continuous in overall tax income, an emission tax rate exists that leads to a Pareto efficient equilibrium.     

Efficient Transfer of Aging Provisions in Private Health Insurance

In German-style private health insurance contracts, aging provisions are used to flatten premium profiles. An individual would like to change insurer if she perceives a low service quality. The first-best optimum is characterized by provision transfers upon insurer changes which are higher for high risks and may be negative for low risks. Should the actual risk status not be verifiable, provision transfers have to be uniform. Efficient transfers will equalize consumption across periods and states if high risks are deterred from switching. Otherwise, the optimum transfer balances the distortion of incentives for high-risk and low-risk individuals.     

Lifetime vs Annual Tax-Transfer Incidence: How Much Less Progressive?

Annual fiscal incidence studies have found that income taxes and cash transfers are highly progressive and that their net effect is to redistribute income from rich to poor. Yet many argue Jhat such studies overstate the redistribution achieved by governments and that lifetime analysis is needed New results suggest that both income taxes and cash transfers are progressive on a lifetime basis, although they are much less progressive than annual studies suggest. The Australian tax-transfer system thus generates some lifetime redistribution from rich to poor, while also enforcing intra-personal redistribution across the life cycle of individuals.     

Electoral competition with environmental policy as a second best transfer

This paper explains why some governments fail to adopt policies that are sufficiently strong, while others adopt policies that are too stringent. Constructing a political economy model in which voters face uncertainty due to the types of politicians and the risk of environmental damage, we show that there is an equilibrium in which a politician uses a weaker environmental policy rather than efficient direct transfers for redistribution. We also show that there is an equilibrium in which a stricter environmental policy can be implemented by a politician who has no incentive to make transfers. Then, we discuss which equilibrium should be more plausible. We conclude that the latter equilibrium in which a too stringent environmental policy emerges can dominate the former unless the citizen’s estimate of environmental risk is sufficiently low.     

Nature of transfers,income tax function and empirical estimation of elasticity of taxable income for Brazil

This article aims to estimate the elasticity of taxable income (ETI), taking into account the nature of transfers and their use as a redistribution package (involving cash and in-kind transfers) to households in Brazil. Our contributions are twofold. First, we provide a simple model with balanced-budget government that reveals the role played by cash and in-kind transfers on the labour supply (and income tax revenues thereof). Next, in order to estimate ETI in the presence of cash and in-kind transfers, Brazilian population surveys (Pesquisa Nacional por Amostra de Domicílios [PNAD]) are used to explore a limited tax reform that was implemented between 1997 and 1998. This reform only affected the higher income tax bracket. Our findings suggest that in-kind (cash) transfers are positively (negatively) associated with reported taxable income and precise estimation of ETI requires estimates of both types of transfers. Last, we estimate the ETI for Brazil in the range from 0.4 to 1.3 not different from those that maximize income tax revenues.     

Repeated Interaction and the Public Provision of Private Goods

The literature suggests that governments can use in-kind transfers to design efficient and targeted redistribution schemes if individual incomes are not directly observable. We investigate the extent to which the self-selection property of in-kind transfers carries through if redistributive transfers are made repeatedly. In a two-period setting, the government may gain information about the individuals' incomes in the first period and exploit this information for making targeted transfers in the second-period. This, however, also triggers changes in the individuals' behavior. If the government can commit to its future policy, the least cost policy may involve randomization between cash and in-kind transfers. Without commitment, the dynamic setting works against the government's interest. It may no longer be able to use in-kind transfers to generate information about the individuals' types.
JEL classification : H 42; H 2     

Labor markets and mating markets: Using taxes to reduce the male–female pay gap

Recently, Frank and McKenzie (J Bioecon 8(3):269–274, 2006) pointed out that beside discrimination, there is a further reason for a wage gap between males and females: If females value partner wages more than males in the mating market, this would increase the pay gap. In this paper, it is analyzed whether there exist policies that may improve the position of females and males from a distributional point of view without destroying the signal females want about the labor market success of males. First-best redistribution policies require the knowledge of the male and female wage preferences. Because this information is not available, a first-best redistribution policy seems infeasible. As an alternative policy, a differentiated wage tax is considered which is less information demanding than a first-best policy. It is shown that a welfare increasing wage tax scheme does exist and that an adequately chosen wage tax scheme may decrease the gender wage gap without destroying the desired signal of wages for labor market success.     

Clientelism and fiscal redistribution: Evidence across countries

This article marshals empirical evidence from a cross-section of up to 87 countries to consider the impact of clientelism on fiscal redistribution in the form of direct taxes and public transfers. Clientelism may directly undermine fiscal redistribution towards poorer individuals because their political support is cheaper to buy, political patrons will limit redistribution to keep clients dependent and, moreover, will eschew fiscal policies that target broad categories of citizens based on explicit criteria, and favor instead private benefits that they can disburse to individual clients with a relatively high degree of discretion. The empirical analysis controls for a range of potentially confounding covariates, explores various transmission channels and accounts for the real possibility that more extensive redistributive programs may undermine the strength of clientelism. The results strongly suggest that clientelism is inimical to income redistribution towards the poor through taxes and transfers and, moreover, identify reduced public good provision as one indirect channel through which clientelism may undermine fiscal redistribution.     

Strategic Inter–Regional Transfers

We derive the equilibrium level of redistribution from one mobile factor (say, the rich or capital) to another possibly mobile factor (say, the poor or labour) when regions choose both their inter–regional transfers and redistributive policies non–cooperatively. It is shown that inter–regional transfers are always desirable (to mitigate the fiscal competition), but cannot be sustained (as a Nash equilibrium) when chosen simultaneoulsy with the redistributive policy. On the other hand, if regions can pre–commit to inter–regional transfers before setting their redistributive policy, their strategic effect makes efficient inter–regional transfers sustainable. However, there are also equilibria with inefficiently small inter–regional transfers or no transfers at all. The effects of regional asymmetries and additional regions on these results are also analyzed.     

A Positive Theory of Income Redistribution

This article examines how redistribution of human capital expenditure can come about voluntarily. A model is developed in which, in the absence of redistribution, human capital expenditure is financed through tax revenue collected locally. However, circumstances are shown under which transfers of human capital expenditure across neighborhoods can take place voluntarily, even in the absence of interfamily altruism. These transfers can eliminate absolute inequality and reduce relative inequality. In addition, the effect on aggregate income of such human capital funding transfers across neighborhoods is evaluated. Empirical evidence supporting the model's implications for the impact of redistribution of human capital expenditure on the persistence of income inequality is presented     

THE REDISTRIBUTION OF PUBLIC FUNDS IN FRANCE IN 1965 AND 1970*

The analysis of the redistribution processes via taxation, transfers and collective services raises several methodological problems among which tax incidence is not the least important. Through two hypotheses of incidence of employers’ social contribution the results of the redistribution of public funds lead to four types of conclusions. Despite the fact that about one third of the French national income is involved in the processes there is no clearcut evidence of any redistribution, except for the nonactive population in so far pensions are considered as redistributed. The positive effects which certain mechanisms may have (e.g. income tax…) are to a certain extent offset, or neutralized, by the anti-redistributive effects of indirect taxation and social contributions. It appears that the results of the redistribution not only depend on the institution network, on the evolution of demographic structures and the rate of growth for the various types of income but also on lack of adaptation between the evolution of the three groups of factors. In last analysis, the reason why redistribution does not appear to have more far-reaching consequences is that social policy amalgamates mechanisms often set up in isolation, whereas any reduction in inequalities must be based on a conscious awareness of the inter-dependence of the situations which create and foster these same inequalities.     

Dynamic yardstick mechanisms

This paper shows that the inability of principals to commit to long-term contracts is irrelevant when dealing with several agents whose private information is correlated. This sharply contrasts with the dynamics of contracting without such correlation. The paper also explores what limitations on yardstick mechanisms can justify the use of long-term contracts. We found that the inability of a principal to commit not to renegotiate long-term contracts is without consequence even if there is a bound on transfers that an agent can be asked to pay. In contrast, short-term contracting fails to implement the commitment solution with constraints on transfers. Second, absent current yardstick, the possibility of using correlated mechanisms in the future allows the principal to implement the first-best with a renegotiation-proof long-term contract whereas this cannot be achieved with short-term contracting.     

Political philosophy,executive constraint and electoral rules

This paper explains the choice of electoral rule by the difference in the ease of implementing targeted transfer. By modeling the choice of electoral rule as a decision by the ruling rich-elite party before universal suffrage is enacted, this paper predicts that a loose constitutional constraint on targeted transfers is conducive to the adoption of proportional representation. To complete the theory, this work argues that the British empiricism and the Continental rationalism have their own views concerning the role and the power of a state, leading to differential levels of constraints on redistribution. Thus the theory explains why Anglo-Saxon countries tend to maintain majoritarian electoral rule. Employing the event history analysis with the two-stage-residual-inclusion approach, this work shows that countries with poorer executive constraints are more likely to adopt proportional representation. Meanwhile, we find evidence supporting that countries with British origin have been associated with tighter constraint upon the executive.     

Modelling Heterogeneous Preferences for Income Redistribution–An Application of Continuous and Discrete Distributions

This paper investigates observable and unobservable heterogeneity in individuals’ preferences for redistribution—differentiating the desired overall volume of redistribution and who should receive benefits, subsidies, or transfers. We use data from a discrete choice experiment (DCE) conducted in the field and based on a representative sample of the German voting‐age population. Applying random parameters and latent class models, our results show that latent and potentially discontinuously distributed factors must be accounted for, as they heavily impact the interpretation of the findings. We find considerable heterogeneity in redistribution preferences, clearly identifying three distinct subgroups. While all groups are in favor of redistribution, they differ regarding the preferred allocation of the redistributive budget.     

Populist policies in the transition to democracy

This paper develops a political economy model that provides an explanation as for why ruling elites in oligarchic societies may rely on income redistribution to the poor (the masses) in order to prevent them from attempting a revolution. We refer to this kind of redistribution as populist redistribution because, first it does not increase the poor's productive capacity (human capital), and second it seeks to “buy” political support (peace) to perpetuate the elite's control of political power. We examine the conditions under which ruling elites choose to deter the poor (by means of military repression and/or populist redistribution), to engage in a dispute with the poor for the control of political power, or, alternatively, to extend democracy. According to the results of the model populist redistribution (or military repression), if any, increases with initial wealth inequality and with the amount of redistribution that the poor can undertake under democracy, and decreases with the relative importance of a human capital externality in production. The model explains why in some cases the use of an apparently inefficient policy of populist redistribution turns out to be optimal for both groups (the ruling elite and the poor class) when the alternative is the use of military repression or default to conflict.     

Are Family Transfers Crowded Out by Public Transfers?

We give an account of an overlapping–generations experiment with multiple families in which voluntary transfers can take the form of support to the elderly or grants to children. Support to the old is a purely intergenerational (intra–family) transfer, whereas grants to children also involve an element of intra–generational (inter–family) redistribution through a compulsory pension system. Our data show that higher compulsory inter–family transfers lead subjects to place relatively more emphasis on support instead of grants: grants are crowded out, but support is not significantly affected. The efficiency of voluntary transfers increases, however. Furthermore, if subjects give transfers, they do not use tokens of direct reciprocity; evidence of indirect reciprocity in transfer behavior can only be obtained for the case where compulsory transfers are high.
JEL classification : C 91; H 55