A Rational Explanation for the Redistribution Paradox. Theory and Empirical Evidence

Date01 November 2016
Published date01 November 2016
DOIhttp://doi.org/10.1111/sjpe.12118
A RATIONAL EXPLANATION FOR THE
REDISTRIBUTION PARADOX. THEORY
AND EMPIRICAL EVIDENCE
Roberto Antonietti*, Francesco Farina** and Fulvio Fontini*
ABSTRACT
The paper provides a rational explanation for the redistribution paradox,
whereby low-income individuals seeking more social security prefer a lower taxa-
tion although this might imply a reduced welfare. A simple model of tax transfer
and redistribution is presented, with various agents facing two different unem-
ployment probabilities. We investigate how the preferred tax rate changes with
the probability of being unemployed. We show that, when the probability of
unemployment for the less-skilled correlates negatively with that of the highly
skilled, the relationship with the tax rate is not monotonic and depends on the
level of risk aversion. This theoretical framework is confirmed in an empirical
investigation based on microeconomic data, and in a robustness test based on
macroeconomic data.
II
NTRODUCTION
Majority rule voting sometimes delivers different outcomes from those pre-
dicted by median voter theory. For instance, being an individual generally on
a below-average income, the decisive median voter ought to express a prefer-
ence for income redistribution, but this does not always happen. Hence the
so-called ‘redistribution paradox’ seen in high-inequality countries where the
majority often vote in favor of political programs aiming for lower tax rates
and consequently shrinking social transfers (as in the United States, where
income distribution is very divided, but many consider its redistribution inade-
quate).
1
Research on voting for redistribution has focused on a variety of fac-
tors, such as measures of income dispersion, cultural values, attitudes, and so
on, but has so far failed to fully explain why the empirical evidence is in con-
trast with the theoretical assumptions. Majority rule voting could be affected
*University of Padova
**University of Siena
1
The expression ‘redistribution paradox’ appeared for the first time in an article by Korpi
and Palme (1998), who established a correlation between welfare states’ targeting models and
the reduction of its dimension. The term has been used ever since in the broader sense we
adopt here, namely to indicate the negative correlation between the Gini index of a given
country and how much of its income is redistributed.
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12118, Vol. 63, No. 5, November 2016
©2016 Scottish Economic Society.
539
by belief-driven cultural values in society at large. For instance, low-income
earners may prefer less redistribution because they expect upward mobility
(Piketty, 1995; Benabou and Ok, 2001). Similarly, according to the ‘pivotal
voting’ view (Benabou, 2000, Benabou and Tirole, 2006), the median voter
may be influenced by the high-income individual’s conviction that less public
intervention will boost market incentives and growth, so the former joins the
latter in voting for a lower tax rate. In a model of dynamic political choice,
Hassler et al. (2003) suggest that voters with below-average incomes favor a
reduction in the tax rates because it is expected to foster innovation, growth,
and upward social mobility. According to Alesina and Angeletos (2005), due
to the influence of the conviction that merit stems from talent and effort,
rather than luck, pave the way to success in life and to the wealth of nations,
the median-income individual is willing to promote the expansion of market
forces by voting for lower taxation. Finally, recent research papers based on
survey experiments explain the redistribution paradox as the result of individ-
uals having limited information about their relative position in the income dis-
tribution and about the degree of effectiveness of public redistribution policies
(Cruces et al., 2013; Kuziemko et al., 2013).
2
In our work, we take a different approach to interpreting the redistribution
paradox, linking the median voters’ choice of tax rate to their risk attitude,
depending on their different skills and risk of unemployment in the economy.
In a simple theoretical setup in which a population of Nindividuals is divided
into two categories in the labor market, namely the high-skill workers (HS)
and the low-skill workers (LS), we consider the possibility of a correlation
between the employment opportunities of HS and LS workers, and we investi-
gate the relationship between this, the voters’ risk attitude, and their prefer-
ences regarding the tax rate. There are several reasons to justify the
hypothesis of a negative correlation between the unemployment risk for HS
and LS workers. Many empirical studies have come to the conclusion that in
most advanced economies, starting with the US, the path of growth in recent
decades has been characterized by a rising rate of growth in total factor pro-
ductivity (TFP) after the rapid diffusion of information technology in the
workplace coinciding with a more than proportional fall in the employment
rate (e.g., Acemoglu et al., 2014). These developments have prompted some to
argue that technology is subject to diminishing returns in its ability to increase
employment and growth in GDP (Gordon, 2012). More specifically, the
expansion of IT within the firm (with the extensive use of computers docu-
mented by many researchers, such as Autor et al., 2003), and the diffusion of
robotics in production systems (which supports the hypothesis of a skill-biased
technical change [SBTC] advanced by Acemoglu, 2002 2003), are the likely
reasons why LS workers are being replaced by much smaller numbers of HS
workers in sectors that use IT.
2
See also Schokkaert and Truyts (2014), who integrate several findings and approaches in
a model in which the utility function comprises both a self-interested and a social justice
component that refers to the perceived justice of the income distribution. We thank an
anonymous reviewer for suggesting this and other references mentioned in the text.
540 R. ANTONIETTI, F. FARINA AND F. FONTINI
Scottish Journal of Political Economy
©2016 Scottish Economic Society

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