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Why World Redistribution Fails

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  • Wojciech Kopczuk
  • Joel Slemrod
  • Shlomo Yitzhaki

Abstract

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9186.

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Date of creation: Sep 2002
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Publication status: published as Wojciech Kopczuk, Joel Slemrod, and Shlomo Yitzhaki . "The Limitations of Decentralized World Redistribution: An Optimal Taxation Approach", European Economic Review, Volume: 49, Issue: 4 (May 2005) Pages: 1051-1079
Handle: RePEc:nbr:nberwo:9186

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  1. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  2. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, Elsevier, vol. 40(2), pages 289-329, February.
  3. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
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  7. Klaus Deininger & Lyn Squire, 1996. "A New Data Set Measuring Income Inequality," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 512, China Economics and Management Academy, Central University of Finance and Economics.
  8. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 195-232.
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  10. Helpman, Elhanan & Sadka, Efraim, 1978. "The optimal income tax : Some comparative statics results," Journal of Public Economics, Elsevier, Elsevier, vol. 9(3), pages 383-393, June.
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Cited by:
  1. Heshmati, Almas, 2004. "The World Distribution of Income and Income Inequality," IZA Discussion Papers 1267, Institute for the Study of Labor (IZA).
  2. Kopczuk, Wojciech & Slemrod, Joel & Yitzhaki, Shlomo, 2005. "The limitations of decentralized world redistribution: An optimal taxation approach," European Economic Review, Elsevier, Elsevier, vol. 49(4), pages 1051-1079, May.

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