Class Altruism and Redistribution

Abstract

Why do tax rates vary so much across countries? We study the role of altruism and ethnic fragmentation in redistribution. The government of a two-party democracy is elected by altruistic voters and decides on a redistributive income tax. Social identification directs voters' altruism toward specific social groups. We identify three main factors that lead to low levels of redistribution and tax rates in the political equilibrium: (i) in-group altruism of the rich voters|which we refer to as class altruism; (ii) the lack of universal altruism among all voters|in particular the rich; and (iii) ethnic fragmentation among poor voters. Using survey data, we show that our model predictions are consistent with the observed difference in tax rates between the US and Europe.

Keywords: Altruism, Social identity, Tax rate, Redistribution, Inequality, Ethnic fragmentation, Social classes, Probabilistic voting.

JEL Classification: D64, D71, D72, H20.