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Income Distribution and Tax Structure: Microeconomic Test of the Meltzer-Richard Hypothesis

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  • Lars-Erik Borge
  • Jørn Rattsø

Abstract

The tax structure is important for the income distribution and therefore a key playground for redistributive politics. The standard theory assumes that more unequal income distribution will create a majority for more redistribution (Meltzer and Richard). This study investigates the empirical validity of this relationship in a microeconomic study of the tax structure in decentralized government in Norway. The choice of revenue instruments studied involves user charges and property taxes oriented towards housing. While user charges act as head taxes, property taxes have distributive consequences. The approach is in the tradition of majority rule, and we show how the local government decisions regarding tax structure and spending level can be understood as one-dimensional. This motivates the empirical analysis where the actual income distribution is measured by the ratio of median to mean income. The estimated model confirms that more equal income distribution implies a shift in the tax burden from property taxes to user charges.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 543.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_543

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  1. Hettich, Walter & Winer, Stanley L, 1988. "Economic and Political Foundations of Tax Structure," American Economic Review, American Economic Association, vol. 78(4), pages 701-12, September.
  2. Charles Brown & Wallace E. Oates, 1985. "Assistance to the Poor in a Federal System," NBER Working Papers 1715, National Bureau of Economic Research, Inc.
  3. Lars-Erik Borge & Jørn Rattsø, 2006. "Property taxation as incentive for cost control:Empirical evidence for utility services in Norway," Working Paper Series 7606, Department of Economics, Norwegian University of Science and Technology.
  4. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
  5. Persson, T. & Tabellini, G., 1997. "Political Economics and Macroeconomic Policy," Papers 630, Stockholm - International Economic Studies.
  6. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  7. Paul, Gilles Saint & Verdier, Thierry, 1996. "Inequality, redistribution and growth: A challenge to the conventional political economy approach," European Economic Review, Elsevier, vol. 40(3-5), pages 719-728, April.
  8. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  9. Goodspeed, Timothy J., 1998. "The Relationship Between State Income Taxes and Local Property Taxes: Education Finance in New Jersey," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 219-38, June.
  10. Douglas Holtz-Eakin & Harvey S. Rosen, 1987. "Federal Deductibility and Local Property Tax Rates," NBER Working Papers 2427, National Bureau of Economic Research, Inc.
  11. Allan Meltzer & Scott Richard, 1983. "Tests of a rational theory of the size of government," Public Choice, Springer, vol. 41(3), pages 403-418, January.
  12. Alberto Alesina & Reza Baqir & William Easterly, 1998. "Redistributive Public Employment," NBER Working Papers 6746, National Bureau of Economic Research, Inc.
  13. Stine, William F., 1994. "Is Local Government Revenue Response to Federal Aid Symmetrical? Evidence from Pennsylvania County Governments in a Era of Retrenchment," National Tax Journal, National Tax Association, vol. 47(4), pages 799-816, December.
  14. Rubinfeld, Daniel L., 1987. "The economics of the local public sector," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 11, pages 571-645 Elsevier.
  15. Skidmore, Mark, 1999. " Tax and Expenditure Limitations and the Fiscal Relationships between State and Local Governments," Public Choice, Springer, vol. 99(1-2), pages 77-102, April.
  16. Borge, Lars-Erik, 2000. "Charging for public services: the case of utilities in Norwegian local governments," Regional Science and Urban Economics, Elsevier, vol. 30(6), pages 703-718, December.
  17. Borge, Lars-Erik & Rattso, Jorn, 1995. "Demographic shift, relative costs and the allocation of local public consumption in Norway," Regional Science and Urban Economics, Elsevier, vol. 25(6), pages 705-726, December.
  18. Henderson, J. Vernon, 1994. "Community choice of revenue instruments," Regional Science and Urban Economics, Elsevier, vol. 24(2), pages 159-183, April.
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