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.     

Voting over income taxation

A major problem of the positive theory of income taxation is to explain why statutory income tax schedules in practice are marginal-rate progressive. While it is commonly believed that this is but a simple consequence of the fact that the number of relatively poor voters exceeds that of richer voters in general, putting this contention in a voting equilibrium context is not a trivial task. We do this here in the context of nonlinear taxation and attempt to provide a formal argument in support of this heuristic claim. We first establish the existence of mixed strategy equilibria and identify certain cases in which marginal-rate progressive taxes are chosen almost surely by the political parties. Unfortunately, we also find that if the tax policy space is not artificially constrained, the support of at least one equilibrium cannot be contained within the set of marginal-rate progressive taxes.     

Deriving Long-Run Inequality Series from Tax Data*

Prior to the last three decades, regular surveys on household income were rare or non-existent in many developed countries, making it difficult for economists to develop long-run series on income distribution. Using taxation statistics, which tend to be available over a longer time span, I propose a method for imputing the incomes of non-taxpayers, and deriving the underlying distribution of income. Because taxation statistics are typically disaggregated by gender, it is possible to derive separate income distribution series for men and women in countries where individuals file separately. I show that over the past four decades, the distribution of adult male incomes and the distribution of family incomes are highly correlated. Applying this method to Australia, I develop a new annual series for inequality from 1942 to 2001. Inequality fell in the 1950s and the 1970s, and rose during the 1980s and 1990s – a pattern similar to that in the UK.     

Viewpoint: Innovations in the theory and practice of redistribution policy

Abstract We present a survey of key results from second‐best optimal redistribution theory and their implications for tax‐transfer policy. The core results include the Corlett‐Hague theorem, the Deaton conditions, the production‐efficiency theorem, the Atkinson‐Stiglitz theorem, and the Mirrlees‐Saez characterization of the optimal non‐linear income tax system. These have been augmented in recent years by optimal participation tax rates, the implications of involuntary unemployment, the use of unconventional instruments, such as minimum wages, in‐kind transfer, and workfare, and the optimal taxation of capital income and bequests.     

A little fairness may induce a lot of redistribution in democracy

We use a model of self-centered inequality aversion suggested by Fehr and Schmidt (Quart. J. Econom. 114 (3) (1999) 817) to study voting on redistribution. We theoretically identify two classes of conditions when an empirically plausible amount of fairness preferences induces redistribution through referenda. We test the predictions of the adapted inequality aversion model in a simple redistribution experiment and find that it predicts voting outcomes far better than the standard model of voting assuming rationality and strict self-interest.     

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.     

Financial expectations and the ‘left-right’ political value scale: Testing for the POUM hypothesis

Using a uniquely defined indicator of political ideology we test whether expectations of future financial well-being have an effect on an individual’s position on the political ‘left-right’ spectrum. We find evidence of a significant “prospect of upward mobility” effect.     

Income Inequality and Political Polarization: Time Series Evidence Over Nine Decades

Rising income inequality and political polarization have led some to hypothesize that the two are causally linked. Properly interpreting such correlations is complicated by multiple factors driving these phenomena, potential feedback between inequality and polarization, measurement issues, and the statistical challenges of modeling non‐stationary variables. We find that a more precise measure of inequality (the inverted Pareto–Lorenz coefficient) is more consistently and statistically related to polarization in the short and long runs than the less precise top 1 percent share of income. We find bi‐directional causality between polarization and inequality, consistent with theoretical conjecture and less formal evidence in previous studies.     

Preferences for redistribution and exposure to tax-benefit schemes in Europe

This paper provides evidence that attitudes towards redistribution are associated with the extent of generosity of the redistributive context experienced by the individual, as measured by the likelihood of receiving positive benefit transfers net of fiscal contribution. We estimate reduced form tax-benefit equations with the EU Statistics on Income and Living Conditions (EU-SILC), and match the implied parameters to the respondents of the European Social Survey (ESS) on the basis of their characteristics. The period of analysis is 2008–2016. For identification, we exploit exogenous cross-country and time variation in tax rules and market income to disentangle implications of exposure to tax-benefit rules on preferences for redistribution from the effects of changes in income inequality. We find that exposure to positive net benefits increases support for redistribution by 1.4%–3% on baseline models, the effect being robust across a variety of specifications.     

The initiative,referendum, and distribution of income: An empirical analysis of Swiss cantons

This study examines how direct democratic institutions affect income distribution before and after taxes. Based on a panel of Swiss cantons from 1945 to 2014, we test the effects of the constitutional reforms of direct democratic instruments. Our findings show that better voter access to the initiative induces policy shifts that significantly decrease top incomes and benefit the upper middle class. For the popular referendum we do not find such effects. The income effects of direct democracy are not a consequence of shifts in fiscal redistribution, but rather result from policy changes affecting pre-tax incomes.     

Redistribution as a selection device

This paper studies the role of the wealth distribution for the market selection of entrepreneurs when agents differ in talent. It argues that the redistribution of initial endowments can increase an economy's surplus because more talented individuals get credit for their risky investment projects. Moreover, the redistribution of initial endowments may lead to a Pareto-improvement although all agents are non-satiable. An agent's entrepreneurial ability is his private information and there is moral hazard in production. I find conditions such that unproductive rich entrepreneurs crowd out productive poor ones on the capital market. Then redistribution of initial endowments may lead to a new equilibrium where market participants are better informed about the entrepreneurs’ ability. The new equilibrium is characterized by (i) the selection of better entrepreneurs, (ii) a higher riskless rate of return on capital, (iii) lower repayments of successful entrepreneurs to their creditors and (iv) the fact that all agents are better off.     

The Covariance Structure of East and West German Incomes and its Implications for the Persistence of Poverty and Inequality

Abstract. Based on data from the German Socio-Economic Panel (GSOEP), this paper analyzes the dynamics of equivalent income in East and West Germany in the years following reunification. Special emphasis is given to the separation of permanent and transitory components, the persistence of transitory shocks and their implications for the persistence of poverty and inequality. The results suggest that in West Germany, between 52 and 69 per cent of cross-sectional income inequality was permanent, and that poor individuals stayed in poverty for two years on average. In East Germany, the share of the permanent component in overall income inequality rose continuously from 20 per cent in 1990 to 72 per cent in 1998, reaching a level near the one that prevailed in West Germany during the same period. The rising importance of time-invariant components in East German incomes was also reflected in expected poverty durations which slightly increased from 1.47 years in 1990 to 1.67 years in 1998.     

Central governance or subsidiarity: A property-rights approach to federalism

We consider a model where one region in a federation can realize a public project after undertaking value-increasing investments. While negotiations on the federal level ensure that an efficient project size is implemented in equilibrium, non-contractibility of investments causes the overall outcome to differ across regimes. If the region bears the entire implementation costs of its policies, underinvestment prevails and subsidiarity (centralized governance) is superior when spillovers are weak (strong). Conversely, if linear cost sharing arrangements are feasible, decentralized authority often admits a socially optimal outcome while centralized authority (with majority or unanimity rule) does not.     

A note on the POUM effect with heterogeneous social mobility

We study the determinants of the (steady-state) POUM effect in a model where the individuals evaluate their expected future income using both their current income and observable characteristics such as education, race or gender.     

Location and ownership of public goods

We introduce location choice for the public good in the property rights framework. We find that it can be optimal to separate location from ownership.     

Mass media and preferences for redistribution

This paper investigates how mass media potentially act on preferences for redistribution. Our hypothesis is that media contribute to shaping the value system of a person, which affects support for redistribution. A theoretical model is proposed which combines demand- and supply-driven media bias. On the demand side, the model considers two types of individuals: non-partisan, whose values are influenced by the media, and partisan, who have strong opinions not affected by the media. We assume that although partisan individuals prefer unbiased information, they hold beliefs that they like to be confirmed; therefore, they tend to consume media with an ideological position similar to theirs. On the supply side, we focus on interest groups’ pressure on media coverage. Our results suggest that the anti-equality lobby is willing to pay more than the competing lobby. Moreover, we show that media bias is a decreasing function of the advertising revenues and an increasing function of the relative weight of ideology vs pluralism in individuals’ demand for media. Adding a second media outlet reduces the likelihood of media bias but not its extent. Finally, if both lobbies are active, the two outlets’ ideological positions are polarised.     

Inflation,nominal portfolios,and wealth redistribution in Canada

Abstract This paper quantifies the redistributional effects of inflation in Canada that arise through the revaluation of nominal assets and liabilities. We find that the effects are non‐trivial even for low inflation episodes. The main winners are young, middle‐class households with mortgage debt. The government receives a windfall gain from its long‐term debt. The old, the rich or the middle‐aged, middle‐class lose, largely owing to their holdings of bonds and non‐indexed defined benefit pension assets. Finally, our Canada‐U.S. comparison reveals that the extent of redistributions can be quite different even between countries of similar economic and legal environments.     

Investment in the absence of property rights; the role of incumbency advantages

In many situations the individuals who can generate some output must enter a contest for appropriating this output. This paper analyses the investment incentives of such agents and the role of incumbency advantages in the contest. Depending on the advantages, an increase in the productivity of the investment can decrease or increase the amount of investment. The results are applied to autocrats’ investment behavior and job specific investment in organizations.