Finance,income inequality and income redistribution

Using a panel fixed effects model for a large sample of countries covering 1975–2005, we test the hypothesis that income inequality caused by finance (financial development, financial liberalization and banking crises) is related to more income redistribution than inequality caused by other factors. Our results provide evidence in support of this hypothesis. We also find that the impact of inequality on redistribution is conditioned by ethno-linguistic fractionalization. Our findings are robust to the inclusion of several control variables suggested by previous studies.     

Consumption smoothing and income redistribution

We show theoretically that income redistribution benefits borrowing-constrained individuals more than is implied by standard relative-income and uninsurable-risk considerations. Empirically, we find in international opinion-survey data that younger and lower-income individuals express stronger support for government redistribution in countries where consumer credit is less easily available. This evidence supports our theoretical perspective if such individuals are more strongly affected by tighter credit supply, in that expectations of higher incomes in the future increase their propensity to borrow.     

Flat income taxation,redistribution and labour market performance

A flat tax rate on labour income has gained popularity in European countries. This article assesses the attractiveness of such a flat tax in achieving redistributive objectives with the smallest distortions to employment. We do so by using a detailed applied general equilibrium model for the Netherlands. The model is empirically grounded in the data and encompasses decisions on hours worked, labour force participation, skill formation, wage bargaining between unions and firms and a wide variety of institutional details. The simulations suggest that the replacement of the current tax system in the Netherlands by a flat rate will harm labour market performance if aggregate income inequality is contained. Only flat tax reforms that reduce redistribution will raise employment. This finding bolsters the notions from optimal tax literature regarding the equity-efficiency trade off and the superiority of nonlinear taxes to obtain redistributive goals in an efficient way.     

Global capital markets,direct taxation and the redistribution of income

Standard fiscal theory suggests that taxation should be heaviest on the least mobile factors of production – for both efficiency and revenue reasons. A shift in tax burdens from capital to labour as economies become globally integrated is thus justified. This theoretical tradition (founded by Ramsay and continued by Mirrlees and Lucas) assumes by construction that profit taxes reduce investment and growth; and while sensitive to inter-generational equity, sidesteps the issue of income distribution within generations. In contrast, starting from Keynes’ critique of these assumptions and building on modern endogenous growth models, it can be shown that profit taxation is not necessarily injurious to productive investment. In practice, moreover, the effect of globalisation has not been to reduce tax rates on capital, but rather to erode the tax base itself (i.e. ‘tax evasion’). Improved information exchange between tax authorities, which is now being driven by fiscal insolvency in developed countries, would allow tax incidence to be shifted so as to improve income distribution within OECD countries. Such cooperation could also permit the replacement of the current discretionary system of fiscal transfers from rich to poor countries (‘development aid’) by equitable sharing of global capital tax revenue.     

Two polar cases of dynamic stability: voluntary exchange and income redistribution

Summary. It is known that when voluntary exchange is permitted at disequilibrium, dynamic stability may fail because of lack of liquidity. In this paper it is shown that when the economy runs out of liquidity dynamic stability can still be restored by means of a planning procedure of redistributing personal incomes.Received: 30 May 2003, Revised: 20 January 2005, JEL Classification Numbers: D01, D50.I wish to thank a referee for helpful comments.     

Trade,growth and income redistribution: A case study of India

The concern of this exercise is with the effectiveness of trade policies and their assessment in achieving economic growth and income equality. A link between growth and equality is provided through employment. If there is substantial increase in employment, the inequality of income distribution is likely to be reduced. Thus, trade by bringing about higher levels of production and employment may reduce income inequality. We have applied a closed input-output model to the Indian data to estimate the interrelationships between trade, growth and income redistribution. It has been found that employment opportunities could be raised substantially through redistribution as well as through export promotion in developing countries such as India, if capital and foreign exchange constraints are not binding. Import substitution, however, does not turn out to be as effective a strategy to achieve these goals.     

收入再分配对我国居民总消费需求的扩张效应

本文研究我国收入再分配与居民总消费需求的关系。文章利用分组的家庭户数据,用三种方法度量居民消费支出,估计了各收入组的边际消费倾向差异。研究中还将变量间的长期动态关系和通货膨胀因素纳入分析范围。研究结果表明,中国的收入分配显著影响了居民消费。根据本文的模拟计算,即使中低收入阶层的收入份额只有微弱的提高,也可以增加数百亿元的居民消费需求。因此,缩小居民收入差距,加大居民收入再分配的力度,壮大中等收入者的队伍,提高农民收入,对刺激我国居民消费需求具有积极作用。     

Lifetime income and public pension: An analysis of the effect on redistribution using a two-period analysis

This paper examines the redistributive effect of public pension programs in the framework of a two-period analysis. Private saving is also considered for comparison purposes as an alternative to public pension for assuring consumption during retirement. An emphasis is placed on investigating the effect of the various formulae for the determination of both the benefit level and the contribution, with the additional purpose of examining the effect of a maximum limit. The Japanese pension systems are evaluated on the basis of the above model framework in comparison with the British system.     

The employment effects of an income redistribution: A test for aggregation bias in the Indian sugar processing industry

This paper analyzes the effect of possible income redistributions on demand for gur (unrefined sugar) in India, and thereafter on derived demand for labor. At this level of microeconomic analysis, it is shown that the employment-generation effect is substantial.     

Production subsidies and redistribution

Who gains from stimulating output? We explore a dynamic model with production subsidies where the population is heterogeneous in one dimension: wealth. There are two channels through which production subsidies redistribute resources across the population. First, poorer agents gain from a rise in wages, since—to the extent there is an operative wealth effect in labor supply—they work harder. Second, because a current output boost will raise consumption today relative to the future, thus lowering real interest rates, poor agents gain in relative terms since their income is based less on interest income. We examine optimal redistribution from the perspective of an arbitrary consumer in the population. We show that, if this consumer has commitment at time zero to set all present and future subsidy rates, and for a class of preferences that admits aggregation in wealth, then output stimulation, and hence redistribution, will only occur at time zero; after that, subsidies are zero. A byproduct of our analysis of this environment is a median-voter theorem: with direct voting over subsidy sequences at time zero, the sequence preferred by the median-wealth consumer is the unique outcome. We also study lack of commitment, since interest-rate manipulation is associated with time inconsistency. We analyze this case formally by looking at the Markov-perfect (time-consistent) equilibrium in a game between successive identical decision makers (e.g., the median agent). Here, subsidies persist—they are constant over time—and are more distortionary than under commitment. Moreover, whereas under commitment asset inequality changes initially—in favor of the consumer who decides on policy—it does not under lack of commitment.     

Voter turnout and intergenerational redistribution

Electoral reforms that lead to reduced turnout modify the composition of the electorate, potentially overrepresenting specific interests in policy implementation. Intergenerational redistribution tilts in favor of the elderly when they are sufficiently numerous, but in favor of the young rich otherwise. We exploit a natural experiment provided by the repeal of compulsory voting in Austrian parliamentary elections to study how exogenous turnout decline affects intergenerational redistribution through pro-young public education spending in Austrian municipalities. Empirically, education spending falls when the proportion of elderly voters exceeds 21% of the electorate, but rises when the proportion of elderly voters is below this threshold.     

Optimal unemployment insurance and redistribution

We characterize optimal income taxation and unemployment insurance in a search‐matching framework where both voluntary and involuntary unemployment are endogenous and Nash bargaining determines wages. Individuals decide whether to participate as job seekers and if so, how much search effort to exert. Unemployment insurance trades off insurance versus search and participation incentives. We also allow for different productivity types so there is a redistributive role for the income tax and show that a piecewise linear wage tax internalizes the macro effects arising from endogenous wages. Type‐specific lump‐sum taxes and transfers can then redistribute between individuals of differing skills and employment states. Our analysis embeds optimal unemployment insurance into an extensive‐margin optimal redistribution framework where transfers to the involuntarily and voluntarily unemployed can differ, and nests several standard models in the literature.     

Myopia, redistribution and pensions

This paper reviews a number of recent contributions that study pension design with myopic individuals. Its objective is to explore how the presence of more or less myopic individuals affects pension design when individuals differ also in productivity. This double heterogeneity gives rise to an interesting interplay between paternalistic and redistributive considerations, which is at the heart of most of the results that are presented. The main part of the paper is devoted to the issue of pension design when myopic individual do not save “enough” for their retirement because their “myopic self” (with a high discount rate) emerges when labor supply and savings decisions are made. Some extensions and variations are considered in the second part. In particular we deal with situations where labor disutility or preferences for consumption are subject to “habit formation” and where sin goods have a detrimental effect on second period health. Myopic individuals tend to underestimate the effects of both habit formation and sinful consumption, which complicates public policy.     

Getting income shares right in agriculture

Most economic studies assume that factor shares are constant across countries and sectors. This article calculates factor shares in the agricultural sector across all US states and shows that there are huge differences, which can be explained by crop composition. In states that focus on more labour-intensive crops, such as fruits, the share of income going to labour is larger than in grain-growing states.     

Holiday taking and income

This paper is the first attempt to estimate the determinants of holiday-taking across several countries. To accomplish this a two-stage estimation procedure is employed which enables incongruous income categories to be transformed into a single income variable. It is found that in the mid-1980s there was a substantial similarity in the holiday taking behaviour of Europeans. The large national differences in holiday participation are explained by differences in income and demographic factors. A remarkable regularity in the responsiveness of the probability of holiday taking to marginal changes in income is found.     

Cross-country income convergence revisited

We reassess convergence of income across countries and its determinants. The ergodic distribution of output per worker features multiple modes. In contrast to previous findings, productivity in the long run is unimodal. The long-run distribution of human capital is multimodal.     

Credible redistribution policy and skilled migration

We analyze the joint determination of income redistribution and migration flows across fiscally independent regions. In our model, regional governments lack commitment so their policy announcements must be credible, and redistribution between skilled and unskilled workers is bounded by informational constraints. In any given region, the welfare of all workers is increasing in the share of skilled workers, as after-tax incomes increase for both skilled and unskilled workers. When skilled workers are more geographically mobile than unskilled ones, the endogenous response of redistribution policy can induce regional agglomeration of skilled workers. We also find that the equilibrium features symmetry-breaking if migration costs are relatively low; and that worker mobility tends to amplify pre-existing welfare differences in income and welfare across regions.     

Pareto optimal redistribution and private charity

When private charity exists and is motivated by utility interdependence a non-Pareto optimal outcome, the ‘free-rider’ problem, typically arises. Nevertheless, incremental fiscal redistribution cannot achieve a Paretian welfare improvement so long as private charity continues at positive levels. Donors respond to incremental fiscal redistribution by reducing their voluntary contributions by exactly a dollar for every dollar transferred in this way. No net transfer is achieved unless incremental fiscal redistribution is pursued to the point where private contributions have been driven to zero. Alternatively, a net transfer may be achieved by fiscal measures which affect donors' marginal incentives to donate.