The Welfare State was not a Free Lunch: Evidence from the Origins of a National Redistribution Fund

This paper examines the local economic impacts of a national-level redistribution policy that was implemented in Denmark in 1937. The policy created a National Redistribution Fund, which partially reimbursed municipal public spending on social, school, and hospital purposes (``RD-grants''). Our analysis reveals three main findings: First, we use historical tax records to obtain detailed annual income and income-distribution data and find that the policy, as proxied by the generosity of the RD-grants, reduced income and increased equality. Second, we show that the RD-grants did not crowd out municipal spending; rather, there is evidence of crowding-in, and municipalities did not lower local taxes in response to the policy. Third, we cannot reject that the policy did not impact internal population movements. Our study sheds light on the effectiveness of national-level redistribution policies, provides insights into the early stages of the Danish welfare state, and contributes to the literature on how the public sector influences the economy.