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Income inequality, size of government, and tax progressivity: A positive theory

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  • Dotti, Valerio

Abstract

I investigate the relationship between income inequality and the composition of public spending in redistributive policies. I extend the Meltzer–Richard model of voting over redistribution allowing voters to choose not only the amount of a uniform lump-sum transfer, but also the level of provision of a public good. The governmental budget is balanced; thus these two choices determine the tax rate on labor income. The multidimensionality of the policy space implies that there is no Condorcet winner. I adopt a citizen-candidate model of electoral competition to tackle this problem. I show that the progressivity of the tax system is increasing in the mean-to-median income ratio while the size of the government need not be. This means that higher income inequality implies a more progressive tax system but, in contrast with the traditional analysis, it may also result in a smaller size of government. Such results are consistent with the most recent findings in the empirical literature.

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  • Dotti, Valerio, 2020. "Income inequality, size of government, and tax progressivity: A positive theory," European Economic Review, Elsevier, vol. 121(C).
    • Handle: RePEc:eee:eecrev:v:121:y:2020:i:c:s0014292119301874
    DOI: 10.1016/j.euroecorev.2019.103327
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    1. Giuranno, Michele G. & Nocco, Antonella, 2020. "Trade tariff, wage gap and public spending," Economic Modelling, Elsevier, vol. 91(C), pages 167-179.
    2. Armbruster, Stephanie, 2020. "The fair-minded rich and healthy? (Youth) unemployment, inequality and fairness concerns in preferences for redistribution," Working papers 2020/02, Faculty of Business and Economics - University of Basel.
    3. Chu, Angus C. & Kou, Zonglai & Wang, Xilin, 2022. "An economic analysis of political meritocracy," Economic Modelling, Elsevier, vol. 106(C).
    4. Dotti, Valerio, 2020. "No Country for Young People? The Rise of Anti-immigration Populism in Ageing Societies," MPRA Paper 100226, University Library of Munich, Germany.
    5. Valerio Dotti, 2021. "Reaching across the aisle to block reforms," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(2), pages 533-578, September.
    6. Valerio Dotti, 2022. "No Country for Young People? The Rise of Anti-Immigration Politics in Ageing Societies," Working Papers 2022:14, Department of Economics, University of Venice "Ca' Foscari".
    7. Fedotenkov, Igor & Idrisov, Georgy, 2021. "A supply-demand model of public sector size," Economic Systems, Elsevier, vol. 45(2).
    8. Dotti, Valerio, 2019. "Political Parties and Policy Outcomes. Do Parties Block Reforms?," MPRA Paper 100227, University Library of Munich, Germany.

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    More about this item

    Keywords

    Redistribution; Government; Tax system; Voting;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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