How Income Inequality Affects Government Redistribution: The Median Voter Versus the Elites

Abstract

This study examines the link between income inequality and redistribution. Specifically, how inequality of market incomes affects (1) the size of the tax and transfer system, and (2) the redistributive effect of the tax and transfer system. Two models of government decision-making — the median voter model and the elites model — suggest there is a relationship between inequality and redistribution and the models predict a different relationship between the two. Panel data from 15 countries over 29 years is used to estimate the relation between inequality and redistribution. The results are consistent with the elites model — a higher concentration of income at the top of the income distribution leads to a lower redistributive effect of the tax and transfer system.

Keywords: elites, income inequality, median voter, redistribution

JEL Classification: A01, D03, D06, H02, H05