Pietro Navarra
Settimana #1: Libertà e redistribuzione Economia e Finanza Pubblica
Pietro Navarra
Settimana #1: Libertà e redistribuzione Economia e Finanza Pubblica
Outline
The redistribution paradox in democratic systems
2. The size of redistribution differs across countries. Why?
3. Literature review on preferences for redistribution and welfare speding
a) social mobility and redistributiuon
b) distributive justice and redistribution
c) other economic, social and political motives for redistribution
4. Why are some sources of inequality justifiable and others aren not?
Autonomy freedom (AF) is our answer
5. A theoretical model of AF and redistribution
6. The empirical investigation
The redistribution paradox
The framers of US constitution supported the extension of suffrage only to property owners. They believed that if all citizens were given the vote, the right to property would have likely been overturned
In modern democracies political rights are distributed equally. Income distributions are such that the median income is generally lower than the average income. In these circumstances a majority of voters (i.e., the poorest 50%) may be expected to impose a transfer scheme that redistributes all income to the mean
History tells us that this expectation proved to be false and the existence of universal suffrage did not lead to the expropriation of the wealth from the rich by the poor. Why did this happen? Why does inequality persist in democracies? Why does not the majority of citizens with incomes below the median vote for extensive welfare systems?
The redistribution paradox
Explanation 1 (efficiency): full income equalization is not carried out through political action in democracies since large scale wealth expropriation would produce adverse dynamic effects for the entire economy
This perspective is based on the hypothesis that significant redistribution of income from more to less productive economic agents would be inefficient. This fact would cause an overall reduction of working incentives and a decline of national income with the associated consequence that the wealth of the majority would inevitably fall (Meltzer and Richard, 1981)
Further, if the rich have an exit option by moving to another jurisdiction, this would tend to limit the available resources and ultimately the scope for redistribution (Epple and Romer, 1991)
The redistribution paradox
Explanation 2 (efficiency): more egalitarian distributions of income are unlikely to be associated with investments in education, innovation and economic growth (Perotti, 1993; Fernandez and Rogerson, 1995). Voters understand these unfavorable effects of income equality on economic development and choose to attenuate their requests for higher redistribution
Explanation 3 (public choice): the notion that democracy expresses the will of people is considered naive (Buchanan and Tullock, 1956; Olson, 1965). Small groups are better equipped in swaying policy choices. They generally enjoy better economic conditions and offer larger per-capita gains that better mobilize their members. Democratic policy makers are captured by such organized groups to the detriment of larger and often disorganized groups (Peltzman, 1976) – Economic power often translates in political power (Breyer and Ursprung, 1998)
The redistribution paradox
Explanation 4 (collective action problem): the concept of voters ignorance due to the fact that for the vast majority of voters the costs of acquiring information about the legislative process and the effect of this acquisition on their welfare are much higher than the expected beneficial effects (Olson, 1957; Popkin, 1991; Bartels, 1996)
Poor and less educated persons have a lower propensity in spending time and money to acquire information about the policy formation process (Rosenstone and Hansen, 1993)
The media, which to a larger extent influence the political opinion of voters, are owned and/or closely controlled by economically powerful groups which are interested in maintaining a relatively unfettered process of wealth accumulation (Chomsky and Herman, 1988; Zaller, 1992)
The redistribution paradox
Explanation 5 (electoral competition): the way in which competition is faced by opposing parties may constitute another interesting possible explanation for why democracy does not allow full redistribution of wealth from the rich towards the poor
Electoral competition is never based on a single issue, but rather it is characterized by parties confronting themselves on multi-issue platforms amongst which many are of non-economic nature (Roemer, 1998)
If political competition takes place within a context in which a non-economic issue play a salient role, the party representing the poor may advocate a softened down redistribution policy
Redistribution across countries
Although income inequality is justifiable in democracies and the poor majority does not expropriate the wealth from the rich minority, governments redistribution policies differ in different countries
Why some countries spend more in welfare and others less? Does individual preferences for redistribution help explain differences in welfare spending across countries?
we describe economic, social and political motivations that explain the cross-country heterogeneity of social expenditure
we examine the effects of people's beliefs about social mobility on the distribution of income and their effect on individuals’ preferences for welfare transfers we analyze the consequences fairness concerns on individual's attitudes toward inequality and redistribution
The theory: Degree of openness
A country's redistributive scheme is the government's response to exogenous income shocks deriving from the degree of openness of its economy: a country with a large exposure to international trade is more vulnerable to large economic instability
The theory: Religiosity
Religion and welfare spending are substitute mechanisms against adverse life events. Therefore, high religiosity is expected to be associated with low redistribution and vice versa
The theory: Fractionalization
Group fragmentation in the population along racial and/or ethnic lines may affect welfare spending. People of different races, religion and ethnicities look at each other with some suspicion and may feel less generous in terms of welfare
The theory: Fractionalization
The theory: Political explanations
PR systems produce more redistributive spending since parliaments under PR are fragmented. Fragmentation leads to multi-party coalition governments that are conducive to large and more persistent public deficits
The theory: Income
People's preferences for redistribution are driven by the net pecuniary gain accruing to single individuals from redistributive taxation: if an individual is a direct recipient of a transfer program she favors it and viceversa (Roberts, 1977)
The theory
The basic "workhorse" political economic model for preferences for redistribution is Meltzer and Richards (1981). It is a static model in which individuals care only about their consumption (income) and have different productivities
The only tax and transfer scheme allowed is given by lump sum transfers financed with a linear income tax. The median voter theorem aggregates individual preferences and captures a very simple political equilibrium
Consider a standard utility function with the usual properties:
where one unit of labor is inelastically supplied and the individual productivity
is
The theory
Assume that the government uses a linear income tax t on income to finance lump sum transfers and that there is a wastage equal to per person which capture the distortionary cost of taxation. Using the government budget constraint, which establishes that every one receives the same lump sum transfer, and defining the average productivity, one can write: Equation (2) simply states that consumption is the sum of after tax labor
income (the first term) plus the lump sum transfer obtained by the government
(the second term) reduced by the waste of taxation (the third term)
The theory
The equilibrium tax rate is the one that maximizes consumption for the
voter with median productivity The distance between average and median is, in this model, the critical
measure of inequality
The tax rate (and therefore the level of the lump sum redistribution) is higher
the larger the difference in productivities (or income, in simplified versions
of the model like this one) between the average and the median voter
The theory
The difference between the self-reported income and average income in society as a measure of the individual's net loss from redistributive taxation: countries with higher individual incomes display lower levels of welfare spending (Meltzer and Richards, 1981)
The theory: Discounting income flows
People's preferences for redistribution points to the individual’s net pecuniary gain from redistributive taxation: if he is a direct recipient of a transfer program she favors it and viceversa
Taxes and redistributive schemes are in place for lengthy periods of time. Individuals are both interested in today's income after taxes and future incomes. Therefore, we would expect that people are likely to maximize a multi-period utility function in which income at further stages will be properly discounted
In this context, people's beliefs about of social mobility play a crucial role in shaping their attitudes toward redistribution. Individuals whose income is currently below the average entertain the hope that they or their children will someday move up in the income ladder and oppose high taxes for the fear of hurting their future selves or their children
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