Why World Redistribution Fails

49 Pages Posted: 14 Sep 2002 Last revised: 29 Oct 2010

See all articles by Joel B. Slemrod

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Wojciech Kopczuk

Columbia University - Graduate School of Arts and Sciences - Department of Economics; Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Shlomo Yitzhaki

Hebrew University of Jerusalem - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2002

Abstract

An optimal linear world income tax that maximizes a border-neutral social welfare function provides a drastic reduction in world consumption inequality, dropping the Gini coefficient from 0.69 to 0.25. In contrast an optimal decentralized (i.e., within countries) redistribution has miniscule effect on world income inequality. Thus, the traditional public finance concern about the excess burden of redistribution cannot explain why there is so little world redistribution. Actual foreign aid is vastly lower than the transfers under the simulated world income tax, suggesting that countries such as the United States either place a much lower value on the welfare of foreigners or else expect that a very significant fraction of cross-border transfers is wasted. The product of the welfare weight and one minus the share of transfers that are wasted constitutes an implied weight that the United States assigns to foreigners. We calculate that value to be as low as 1/2000 of the value put on the welfare of an American, suggesting that U.S. policy implicitly assumes either that essentially all transfers are wasted or places essentially no value on the welfare of the citizens of the poorest countries.

Suggested Citation

Slemrod, Joel B. and Kopczuk, Wojciech and Yitzhaki, Shlomo, Why World Redistribution Fails (September 2002). NBER Working Paper No. w9186. Available at SSRN: https://ssrn.com/abstract=330325

Joel B. Slemrod (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

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Wojciech Kopczuk

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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Columbia University - School of International & Public Affairs (SIPA)

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National Bureau of Economic Research (NBER) ( email )

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Shlomo Yitzhaki

Hebrew University of Jerusalem - Department of Economics ( email )

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Israel
+972 2 659 2201 (Phone)
+972 2 652 2319 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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