Budget Deficits and Redistributive Politics

This paper proposes a new view of the forces in the political process thatcause governments to accumulate debt. The analysis builds on a model of redistributive politics that, contrary to median voter models, does not restrict the set of policies that politicians can propose. I show that deficits occur even in an environment where voters (and periods) are homogeneous. This is an environment where previous political theories of debt would predict budget balance. In the model deficits are a way for candidates to better target promises to voters and are therefore used as tools of redistributive politics. The main contribution of the analysis is to show that the same forces that push candidates to redistribute resources across voters to pursue political advantage are forces that generate budget deficits.     

Income Distribution, Redistributive Politics, and Economic Growth

This article studies the political economy of inequality and growth by combining the political economy approach with an imperfect capital market assumption. In the present model, there emerges a class of individuals whose members do not invest privately beyond the state-financed schooling, due to their initial wealth constraint. We show that inequality affects private investment not only through the political effect, which relates inequality to private investment negatively, but also through what we call the threshold effect, which associates inequality to private investment positively. In general, private investment and inequality do not show a monotone negative relationship.     

Redistributive Taxation and Public Education

This paper examines the relative effectiveness of publicly provided ‘white collar’ professional (university) education versus ‘blue collar’ vocational training in achieving the government's redistributive goals. Although professional education directly benefits high‐skill high‐income workers and vocational training directly benefits low‐skill low‐income workers, we show that either provision of more professional education or less vocational training than in the first‐best allocation is optimal along the second‐best Paretian frontier since this facilitates incentive compatibility in labor supply decisions. Accordingly, the observation that public higher education expenditures in most countries favor universities is not necessarily inconsistent with an optimal redistributive program.     

Constitutional Constraints and Redistributive Activities

This paper shows that non-productive activities aimed at influencing the distribution of income might increase when constitutional constraints against redistribution are imposed or strengthened. By facilitating redistribution, on the other hand, influence activities could be limited, and the economic performance improved. We argue that these effects could be important in countries with poorly developed democratic institutions, and that research in constitutional economics needs to be more aware of perverse effects of this kind.     

Redistributive policy,inequality and growth

Does redistribution increase inequality? Is inequality harmful for growth? Both questions have recently been addressed in a number of single-tax models. In this paper, I examine the relationship between policy, growth and inequality when income and inherited wealth can be taxed at different rates. In the model, parents accumulate human capital and a return-bearing, storable good in order to increase the quality of their children. Inequality arises because the learning ability of children is stochastic. Redistributive labor income taxation has a negative impact on short- and long-run growth while taxation of inherited stocks increases growth. Effects of both taxes on income inequality are ambiguous. A switch from income to inheritance taxation may increase average utility of all generations involved. I calculate a structure-induced equilibrium of the political process by means of a stochastic simulation of the model. In the short run initial wealth-inequality can stimulate growth, while initial inequality of the endowment with human capital is harmful for growth.     

Optimal Tax-Transfer Systems and Redistributive Policy

In this paper we develop "optimal yardsticks" to gauge the effectiveness of given tax and benefit policies in reducing inequality. We show that the conjunction of the optimal tax and optimal benefits policies constitutes the optimal tax-and-benefit policy, given the tax and benefit budget sizes. A decomposition formula enables trends in the inequality impact of taxes and benefits to be explained in terms of changing policy effectivess (targeting) and budget size effects. The analysis incorporates a distributional judgement parameter, for sensitivity analysis, and concludes with an examination of the Finnish case for the period 1971–1990.
JEL Classification : D 63     

User Charges as Redistributive Devices

In this model, a mix of public and private provision of private goods arises naturally in the economy. We characterize the social optimum in the presence of a linear tax/public expenditure system and show how a user charge can be welfare- or Pareto-improving, when the users are the poor. The charge discourages the rich from opting into the public program and allows the policymaker to restructure the tax/expenditure system in a way that is beneficial for the poor. If the ensuing welfare gain is large enough to outweigh the loss for the remaining users, a charge is desirable.     

Redistributive politics with distortionary taxation

This paper proposes a first step towards a positive theory of tax instruments. We present a model of redistributive politics that extends those of Myerson [R. Myerson, Incentives to cultivate minorities under alternative electoral systems, Amer. Polit. Sci. Rev. 87 (1993) 856-869] and Lizzeri and Persico [A. Lizzeri, N. Persico, The provision of public goods under alternative electoral incentives, Amer. Econ. Rev. 91 (2001) 225-239]. Two politicians compete in terms of targeted redistributive promises financed through distortionary taxes. We solve for the case of both targetable and non-targetable taxes. We prove that there is an imperfect efficiency-targetability trade off on the tax side. Politicians prefer targetable taxes over non-targetable ones, especially when the latter are less efficient. Yet, targetable taxation is always used even when it is very inefficient compared to non-targetable taxes.     

Redistributive taxation as social insurance

The modern literature on nonlinear optimal taxation treats differences in income as being due to unobserved differences in ability. A striking result of this assumption is that high income agents should face a zero marginal tax rate. In this paper I assume that differences in observed income are due to exogenous differences in luck. Hence the optimal redistributive tax involves trading off the benefits due to ‘social insurance’ with the costs due to reduced incentives. I derive the optimal forms for linear and nonlinear taxes, and compute some algebraic and numeric examples. Typically high income individuals will face quite high marginal tax rates.     

Redistributive pensions in the developing world

Redistributive so‐called social pension schemes have seen a remarkable surge in developing countries. These schemes often target the rural elderly and correlate with urbanization rates, urban rural‐wage differentials, and family norms. We use this stylized evidence to motivate a political economy model for a Beveridgean pension system with trade‐offs between four groups: the (poorer) rural old and young, and the (richer) urban old and young. We show under which conditions governments will install a pension system and increase its generosity as the share of the urban population rises, productivity differentials between urban and rural workers widen, or the social norm erodes. Our conclusion is that the role of the rural–urban divide in shaping redistribution merits more scholarly attention, as the gap between cities and the countryside widens in many developing countries.     

Optimal Redistributive Income Taxation and Efficiency Wages*

In this paper, we integrate efficiency wage setting with the theory of optimal redistributive income taxation. In doing so, we use a model with two skill types, where efficiency wage setting characterizes the labor market faced by the low‐skilled, whereas the high‐skilled face a conventional, competitive labor market. We show that the marginal income tax implemented for the high‐skilled is negative under plausible assumptions. The marginal income tax facing the low‐skilled can be either positive or negative, in general. An increase in unemployment benefits contributes to a relaxation of the binding self‐selection constraint, which makes this instrument particularly useful from the perspective of redistribution.     

Redistributive innovation policy,inequality, and efficiency

We examine the efficiency and distributional effects of regressive and progressive public R&D policies that target high‐tech and low‐tech sectors using a heterogenous‐agent growth model with in‐house R&D and incomplete capital markets. We find that such policies have important implications for efficiency and inequality. A regressive public R&D investment financed by income tax could boost growth and welfare via a positive effect on individual savings and effort. It could, however, also lower growth and welfare via its effect on the efficiency–inequality trade‐off. Thus, the relationship between public R&D spending and welfare is hump‐shaped, admitting an optimal degree of regressivity in public R&D spending. Using our baseline model, and the US state‐level GDP data, we derive the degree of regressiveness of public R&D investment in US states. We find that US states are more regressive in their R&D investment than the optimal regressiveness implied by our growth model.     

Redistributive Taxation under Ethical Behaviour*

We consider the implications of ethical behaviour on the effect of a redistributive tax‐transfer system. In choosing their labour supplies, individuals take into account whether their tax liabilities correspond to what they view as ethically acceptable. If tax liabilities are viewed as ethically acceptable, a taxpayer behaves ethically, does not distort her behaviour, and chooses to work as if she were not taxed. On the other hand, if ethical behaviour results in tax liabilities that exceed those that are ethically acceptable, she behaves egoistically (partially or fully), distorts her behaviour, and chooses her labour supply taking into account the income tax. We establish taxpayers' equilibrium behaviour and obtain that labour supply is less elastic when taxpayers may behave ethically than when they act egoistically. We characterise and compare the egoistic voting equilibrium linear tax schedules under potentially ethical and egoistic behaviour. We also compare our results to those obtained under altruism, an alternative benchmark.     

Redistributive taxation,wealth distribution,and economic growth

This paper examines the relationship between wealth distribution and economic growth in an endogenous growth model with heterogeneous households and redistributive taxation. In this paper, we incorporate an endogenous determination of redistributive policy into the model, focusing on the relation between pre- and post-tax inequality. Endogenous redistributive policy affects wealth distribution and economic growth. Therefore, the relation between post-tax inequality and economic growth is different from that between pre-tax inequality and economic growth. Results show that there exists a negative correlation between pre-tax inequality and economic growth, whereas there exists an inverted-U relationship between post-tax inequality and economic growth in a voting equilibrium.     

Redistributive taxation with heterogeneous relative consumption concerns

Abstract This paper studies the impact of redistributive income taxation in a society where only some individuals are motivated by relative consumption concerns. Introducing this heterogeneity raises theoretical challenges since (i) earned income becomes an imperfect indicator of underlying ability and (ii) relative concerns may be inadmissable in the social objective. A new behavioural model is developed in which only relatively‐concerned individuals choose work effort strategically. Linear tax/transfer systems schemes are then characterized and simulated for a series of welfarist and non‐welfarist social objectives, and for different degrees of preference heterogeneity. A key result is that a government which understands the extent of relative consumption concerns–but places no social weight on individuals with such preferences–nevertheless sets a significantly more progressive tax system than a government which ignores relative consumption motivations altogether.     

Redistributive effects of minimal equal sacrifice taxation

We examine the circumstances under which minimal equal sacrifice taxation reduces income inequality. Focusing on absolute sacrifice and relative inequality, we show that after tax incomes are more equally distributed than before tax incomes and that after tax inequality decreases with the revenue to be raised if and only if the elasticity of the marginal utility of income is decreasing. However, other things equal, after tax inequality is shown to decline as the utility function becomes more concave. We investigate next how these conclusions extend when one takes the absolute inequality view and considers that it is the relative loss in utility that has to be equalized across individuals.     

Redistributive policies with heterogeneous social preferences of voters

There is growing evidence on the roles of fairness and other-regarding preferences as fundamental human motives. Call voters with fair preferences, as in Fehr and Schmidt (1999), fair-voters. By contrast, traditional political economy models are based on selfish-voters who derive utility solely from “own” payoff. In a general equilibrium model with endogenous labor supply, a mixture of fair and selfish voters choose optimal policy through majority voting. First, we show that majority voting produces a unique winner in pairwise contests over feasible policies (the Condorcet winner). Second, we show that a preference for greater fairness leads to greater redistribution. An increase in the number of fair voters can also lead to greater redistribution. Third, we show that in economies where the majority are selfish-voters, the decisive policy could be chosen by fair-voters, and vice versa. Fourth, while choosing labor supply, even fair voters behave exactly like selfish voters. We show how this apparently inconsistent behavior in different domains (voting and labor supply) can be rationalized within the model.     

Optimal Redistributive Taxation in a Search Equilibrium Model

This paper characterizes optimal non-linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous involuntary unemployment due to frictions in the labour markets. Redistributive taxation distorts labour demand and wages. Compared to their efficient values, gross wages, unemployment, and participation are lower. Average tax rates are increasing. Marginal tax rates are positive, even at the top. Finally, numerical simulations suggest that redistribution is much more important in our setting than in a comparable Mirrlees-type setting.     

Redistributive taxation in a simple perfect foresight model

We investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation. First, even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages. Second, under any convergent redistributive tax policy which maximizes a Paretian social objective, the capital income tax will converge to zero, independent of the factor supply elasticities. These results are independent of workers' holdings of capital.     

中国财政再分配效应测算

本文拓展了财政再分配的传统分析方法,将间接税纳入研究框架,构建了一个可以综合测算包括税收、社会保障和转移支付在内的各项财政工具的再分配效应的分析框架,综合采用财政预算归宿法、居民收入核算法和MT指数测量与分解法,以中国2012年投入产出表和城乡居民调查数据为基础,构建了社会核算矩阵和可计算一般均衡模型。测算结果表明:我国的财政再分配从整体上对收入分配为逆向调节。财政再分配导致全国基尼系数上升2%,其中,来源端间接税、政府社会保障支出和支出端间接税分别使基尼系数上升1.7%、1.3%和3.2%,转移支付、社会保障缴费和个人所得税分别使基尼系数下降3%、0.4%和0.7%。这一现象在中等收入国家和高收入国家中均不多见。主要原因在于,我国转移支付、政府社会保障支出、个人所得税和社会保障缴费在财政支出和收入中所占比重过低,对收入分配的正效应过小,间接税在财政收入中占比过高,对收入分配的负效应过大。