IDEAS home Printed from https://ideas.repec.org/p/lis/liswps/743.html
   My bibliography  Save this paper

Income Inequality, Redistributive Preferences and the Extent of Redistribution: An Empirical Application of Optimal Tax Approach

Author

Listed:
  • Hannu Tanninen
  • Matti Tuomala
  • Elina Tuominen

Abstract

We examine empirically the relationship between the extent of redistribution and the components of the Mirrlees framework, with a focus on inherent inequality and government’s redistributive preferences. We have constructed our income distribution variables from the Luxembourg Income Study (LIS) database, which provides information on both factor and disposable incomes. Our redistributive preference measure is constructed using the optimal tax formula for which we have collected data from various sources. In addition to traditional linear specifications, we use flexible methods to allow nonlinearities because pre-specified functional forms are not easy to justify in empirical investigations of the optimal tax framework. We study 14 advanced countries for approximately four decades and find support for the Mirrlees model: There is a positive relationship between factor-income inequality and the extent of redistribution. We also find a link between our redistributive preference measure and the extent of redistribution.

Suggested Citation

  • Hannu Tanninen & Matti Tuomala & Elina Tuominen, 2019. "Income Inequality, Redistributive Preferences and the Extent of Redistribution: An Empirical Application of Optimal Tax Approach," LIS Working papers 743, LIS Cross-National Data Center in Luxembourg.
    • Handle: RePEc:lis:liswps:743
    as

    Download full text from publisher

    File URL: http://www.lisdatacenter.org/wps/liswps/743.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ordás Criado, C. & Valente, S. & Stengos, T., 2011. "Growth and pollution convergence: Theory and evidence," Journal of Environmental Economics and Management, Elsevier, vol. 62(2), pages 199-214, September.
    2. Persson, Torsten & Tabellini, Guido, 2002. "Political economics and public finance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 24, pages 1549-1659, Elsevier.
    3. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
    4. Roland Benabou & Efe A. Ok, 2001. "Social Mobility and the Demand for Redistribution: The Poum Hypothesis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 447-487.
    5. Thomas Piketty & Emmanuel Saez & Stefanie Stantcheva, 2014. "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 230-271, February.
    6. Ahmad, Ehtisham & Stern, Nicholas, 1984. "The theory of reform and indian indirect taxes," Journal of Public Economics, Elsevier, vol. 25(3), pages 259-298, December.
    7. Amedeo Spadaro & Luca Piccoli & Lucia Mangiavacchi, 2015. "Optimal Taxation, Social Preferences and the Four Worlds of Welfare Capitalism in Europe," Economica, London School of Economics and Political Science, vol. 82(327), pages 448-485, July.
    8. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," The World Bank Economic Review, World Bank, vol. 10(3), pages 565-591, September.
    9. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
    10. Francesco Scervini, 2012. "Empirics of the median voter: democracy, redistribution and the role of the middle class," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 10(4), pages 529-550, December.
    11. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
    12. Kanbur, Ravi & Tuomala, Matti, 1994. " Inherent Inequality and the Optimal Graduation of Marginal Tax Rates," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(2), pages 275-282.
    13. Malte Luebker, 2014. "Income Inequality, Redistribution, and Poverty: Contrasting Rational Choice and Behavioral Perspectives," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(1), pages 133-154, March.
    14. Milanovic, Branko, 2010. "Four critiques of the redistribution hypothesis: An assessment," European Journal of Political Economy, Elsevier, vol. 26(1), pages 147-154, March.
    15. François Bourguignon & Amedeo Spadaro, 2012. "Tax–benefit revealed social preferences," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 10(1), pages 75-108, March.
    16. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, vol. 4(2), pages 163-185, February.
    17. Qi Li & Jeffrey Scott Racine, 2006. "Density Estimation, from Nonparametric Econometrics: Theory and Practice," Introductory Chapters, in: Nonparametric Econometrics: Theory and Practice, Princeton University Press.
    18. Anthony Atkinson & Thomas Piketty, 2010. "Top Incomes : A Global Perspective," PSE-Ecole d'économie de Paris (Postprint) halshs-00754875, HAL.
    19. Lindert, Peter H., 2000. "Three centuries of inequality in Britain and America," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 3, pages 167-216, Elsevier.
    20. Tuomala, Matti, 2016. "Optimal Redistributive Taxation," OUP Catalogue, Oxford University Press, number 9780198753414.
    21. Peltzman, Sam, 1980. "The Growth of Government," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 209-287, October.
    22. Immervoll, Herwig & Richardson, Linda, 2011. "Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades?," IZA Discussion Papers 6030, Institute of Labor Economics (IZA).
    23. Greiner, Alfred & Kauermann, Göran, 2008. "Debt policy in euro area countries: Evidence for Germany and Italy using penalized spline smoothing," Economic Modelling, Elsevier, vol. 25(6), pages 1144-1154, November.
    24. repec:ces:ifodic:v:3:y:2005:i:1:p:14567536 is not listed on IDEAS
    25. Michael Berlemann & Sören Enkelmann & Torben Kuhlenkasper, 2015. "Unraveling the Relationship Between Presidential Approval and the Economy: A Multidimensional Semiparametric Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(3), pages 468-486, April.
    26. Atkinson, A. B. & Piketty, Thomas (ed.), 2010. "Top Incomes: A Global Perspective," OUP Catalogue, Oxford University Press, number 9780199286898.
    27. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
    28. Christiansen, Vidar & Jansen, Eilev S., 1978. "Implicit social preferences in the Norwegian system of indirect taxation," Journal of Public Economics, Elsevier, vol. 10(2), pages 217-245, October.
    29. Moene, Karl Ove & Wallerstein, Michael, 2001. "Inequality, Social Insurance, and Redistribution," American Political Science Review, Cambridge University Press, vol. 95(4), pages 859-874, December.
    30. Peltzman, Sam, 1980. "The Growth of Government," Working Papers 1, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    31. Alberto Alesina & Edward Glaeser & Bruce Sacerdote, 2001. "Why Doesn't The US Have a European-Style Welfare State?," Harvard Institute of Economic Research Working Papers 1933, Harvard - Institute of Economic Research.
    32. Persson, Mats, 1995. " Why Are Taxes So High in Egalitarian Societies?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 569-580, December.
    33. Perotti, Roberto, 1996. "Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-187, June.
    34. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 205-229.
    35. Jacobs, Bas & Jongen, Egbert L.W. & Zoutman, Floris T., 2017. "Revealed social preferences of Dutch political parties," Journal of Public Economics, Elsevier, vol. 156(C), pages 81-100.
    36. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
    37. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
    38. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, volume 1, number 8355.
    39. Bose, Niloy & Murshid, Antu Panini & Wurm, Martin A., 2012. "The Growth Effects of Property Rights: The Role of Finance," World Development, Elsevier, vol. 40(9), pages 1784-1797.
    40. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-927, October.
    41. Milanovic, Branko, 2000. "The median-voter hypothesis, income inequality, and income redistribution: an empirical test with the required data," European Journal of Political Economy, Elsevier, vol. 16(3), pages 367-410, September.
    42. Matti Tuomala & Hannu Tanninen, 2005. "Inherent Inequality and the Extent of Redistribution in OECD Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(1), pages 48-53, 04.
    43. Andrea Brandolini & Anthony B. Atkinson, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 771-799, September.
    44. Matti Tuomala & Hannu Tanninen, 2005. "Inherent Inequality and the Extent of Redistribution in OECD Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(01), pages 48-53, April.
    45. Alberto Alesina & Edward Glaeser & Bruce Sacerdote, 2001. "Why Doesn't the US Have a European-Style Welfare System?," NBER Working Papers 8524, National Bureau of Economic Research, Inc.
    46. Ahamada, Ibrahim & Flachaire, Emmanuel, 2010. "Non-Parametric Econometrics," OUP Catalogue, Oxford University Press, number 9780199578009.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jacobs, Bas & Jongen, Egbert L.W. & Zoutman, Floris T., 2017. "Revealed social preferences of Dutch political parties," Journal of Public Economics, Elsevier, vol. 156(C), pages 81-100.
    2. Matti Tuomala & Hannu Tanninen, 2005. "Inherent Inequality and the Extent of Redistribution in OECD Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(01), pages 48-53, April.
    3. Corneo, Giacomo & Neher, Frank, 2015. "Democratic redistribution and rule of the majority," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 96-109.
    4. repec:ces:ifodic:v:3:y:2005:i:1:p:14567536 is not listed on IDEAS
    5. Christian Houle, 2017. "Inequality, ethnic diversity, and redistribution," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 15(1), pages 1-23, March.
    6. Christian Houle, 2017. "Inequality, ethnic diversity, and redistribution," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 15(1), pages 1-23, March.
    7. Jo Thori Lind, 2005. "Why is there so little redistribution?," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 31, pages 111-125.
    8. Thomas Piketty & Emmanuel Saez, 2012. "Optimal Labor Income Taxation," NBER Working Papers 18521, National Bureau of Economic Research, Inc.
    9. Gründler, Klaus & Köllner, Sebastian, 2017. "Determinants of governmental redistribution: Income distribution, development levels, and the role of perceptions," Journal of Comparative Economics, Elsevier, vol. 45(4), pages 930-962.
    10. Boadway,Robin & Cuff,Katherine, 2022. "Tax Policy," Cambridge Books, Cambridge University Press, number 9781108949453.
    11. Andreas Georgiadis & Alan Manning, 2012. "Spend it like Beckham? Inequality and redistribution in the UK, 1983–2004," Public Choice, Springer, vol. 151(3), pages 537-563, June.
    12. Ferey, Antoine & Haufler, Andreas & Perroni, Carlo, 2023. "Incentives, globalization, and redistribution," Journal of Public Economics, Elsevier, vol. 224(C).
    13. Salvatore Morelli & Timothy Smeeding & Jeffrey Thompson, 2014. "Post-1970 Trends in Within-Country Inequality and Poverty: Rich and Middle Income Countries," CSEF Working Papers 356, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    14. Cervellati, Matteo & Esteban, Joan & Kranich, Laurence, 2010. "Work values, endogenous sentiments redistribution," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 612-627, October.
    15. Jaejoon Woo, 2023. "The long-run determinants of redistribution: evidence from a panel of 47 countries in 1967–2014," Empirical Economics, Springer, vol. 64(4), pages 1811-1860, April.
    16. Matti Tuomala & Hannu Tanninen, 2005. "Inherent Inequality and the Extent of Redistribution in OECD Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(1), pages 48-53, 04.
    17. Persson, Torsten & Tabellini, Guido, 2002. "Political economics and public finance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 24, pages 1549-1659, Elsevier.
    18. Alesina, Alberto & La Ferrara, Eliana, 2005. "Preferences for redistribution in the land of opportunities," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 897-931, June.
    19. Enea Baselgia & Reto Foellmi, 2022. "Inequality and growth: a review on a great open debate in economics," WIDER Working Paper Series wp-2022-5, World Institute for Development Economic Research (UNU-WIDER).
    20. Stanley L. Winer, 2016. "The Political Economy of Taxation: Power, Structure, Redistribution," Carleton Economic Papers 16-15, Carleton University, Department of Economics.
    21. Weijie Luo & Andrew Pickering & Paulo Santos Monteiro, 2017. "Inequality and the Size of Government," Discussion Papers 17/02, Department of Economics, University of York.

    More about this item

    Keywords

    -nonlinearity; preferences;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lis:liswps:743. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Piotr Paradowski (email available below). General contact details of provider: https://edirc.repec.org/data/lisprlu.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.