An optimal linear world income tax that maximizes a border-neutral social welfare function provides a drastic reduction in world consumption inequality, dropping the Gini coefficient from 0.69 to 0.25. In contrast an optimal decentralized (i.e., within countries) redistribution has miniscule effect on world income inequality. Thus, the traditional public finance concern about the excess burden of redistribution cannot explain why there is so little world redistribution. Actual foreign aid is vastly lower than the transfers under the simulated world income tax, suggesting that countries such as the United States either place a much lower value on the welfare of foreigners or else expect that a very significant fraction of cross-border transfers is wasted. The product of the welfare weight and one minus the share of transfers that are wasted constitutes an implied weight that the United States assigns to foreigners. We calculate that value to be as low as 1/2000 of the value put on the welfare of an American, suggesting that U.S. policy implicitly assumes either that essentially all transfers are wasted or places essentially no value on the welfare of the citizens of the poorest countries.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
9186.
Length: Date of creation: Sep 2002 Date of revision: Handle: RePEc:nbr:nberwo:9186
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Find related papers by JEL classification: F35 - International Economics - - International Finance - - - Foreign Aid H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Craig Burnside & David Dollar, 2000.
"Aid, Policies, and Growth,"
American Economic Review,
American Economic Association, vol. 90(4), pages 847-868, September.
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