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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. Torsten Persson and Guido Tabellini., 1991. "Is Inequality Harmful for Growth? Theory and Evidence," Economics Working Papers 91-155, University of California at Berkeley.
  2. 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.
  3. Eaton, Jonathan & Rosen, Harvey S., 1980. "Labor supply, uncertainty, and efficient taxation," Journal of Public Economics, Elsevier, vol. 14(3), pages 365-374, December.
  4. Abowd, John M & Card, David, 1987. "Intertemporal Labor Supply and Long-term Employment Contracts," American Economic Review, American Economic Association, vol. 77(1), pages 50-68, March.
  5. 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.
  6. 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, vol. 21(1), pages 225-230, January.
  7. 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.).
  8. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  9. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
  10. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  11. Hellwig, Martin F., 1986. "The optimal linear income tax revisited," Journal of Public Economics, Elsevier, vol. 31(2), pages 163-179, November.
  12. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  13. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
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Cited by:
  1. BĂ©nabou, Roland, 2000. "Tax And Education Policy In A Heterogeneous Agent Economy: What Levels Of Redistribution Maximize Growth And Efficiency?," CEPR Discussion Papers 2446, C.E.P.R. Discussion Papers.
  2. Ayse Imrohoroglu & Antonio Merlo & Peter Rupert, 1996. "On the political economy of income redistribution and crime," Working Paper 9609, Federal Reserve Bank of Cleveland.
  3. Dean Corbae, 2007. "Politico-Economic Consequences of Rising Wage Inequality," 2007 Meeting Papers 129, Society for Economic Dynamics.
  4. Floden, Martin, 2000. "The Effectiveness of Government Debt and Transfers as Insurance," Working Paper Series in Economics and Finance 377, Stockholm School of Economics.

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