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Social insurance and taxation under sequential majority voting and utilitarian regimes

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  • Rao Aiyagari, S.
  • Peled, Dan

Abstract

It is often argued that with a positively skewed income distribution (median less than mean) majority voting would result in higher tax rates than maximizing average welfare and, hence, lower aggregate savings. We reexamine this view in a capital accumulation model, in which distorting redistributive taxes provide insurance against idiosyncratic shocks and income distributions evolve endogenously. We find small differences of either sign between the tax rates set by a majority voting and a utilitarian government, for reasonable parametric specifications, despite the fact that model simulations produce positively skewed distributions of total income across agents.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 19 (1995)
Issue (Month): 8 (November)
Pages: 1511-1528

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Handle: RePEc:eee:dyncon:v:19:y:1995:i:8:p:1511-1528

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References

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  1. Hellwig, Martin F., 1986. "The optimal linear income tax revisited," Journal of Public Economics, Elsevier, vol. 31(2), pages 163-179, November.
  2. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 39(3), pages 297-302, July.
  3. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
  4. Kydland, Finn E., 1984. "A clarification: Using the growth model to account for fluctuations : Reply to James Heckman," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 21(1), pages 225-230, January.
  5. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  6. John M. Abowd & David Card, 1986. "Intertemporal Labor Supply and Long Term Employment Contracts," NBER Working Papers 1831, National Bureau of Economic Research, Inc.
  7. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, vol. 4(2), pages 163-185, February.
  8. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  9. Persson, Torsten & Tabellini, Guido, 1991. "Is Inequality Harmful for Growth? Theory and Evidence," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt00x7n68q, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  10. Christopher D. Carroll, 1991. "Buffer stock saving and the permanent income hypothesis," Working Paper Series / Economic Activity Section 114, Board of Governors of the Federal Reserve System (U.S.).
  11. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  12. Eaton, Jonathan & Rosen, Harvey S., 1980. "Labor supply, uncertainty, and efficient taxation," Journal of Public Economics, Elsevier, vol. 14(3), pages 365-374, December.
  13. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Ayse Imrohoroglu & Antonio Merlo & Peter Rupert, 1996. "On the political economy of income redistribution and crime," Working Paper 9609, Federal Reserve Bank of Cleveland.
  2. Corbae, Dean & D'Erasmo, Pablo & Kuruscu, Burhanettin, 2009. "Politico-economic consequences of rising wage inequality," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(1), pages 43-61, January.
  3. Martin Floden, 2000. "The Effectiveness of Government Debt and Transfers as Insurance," Econometric Society World Congress 2000 Contributed Papers 1013, Econometric Society.
  4. Roland Benabou, 1999. "Tax and Education Policy in a Heterogeneous Agent Economy: What Levels f Redistribution Maximize Growth and Efficiency?," NBER Working Papers 7132, National Bureau of Economic Research, Inc.

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