A Note on Income Distribution and Government Transfers

Abstract

Several authors have argued that inequality hinders growth by leading to high distorting taxes and transfers. We retest whether inequality and transfers are positively linked, using several alternative definitions and data sets including new income data assembled by the World Bank. We correct an error in a result of Persson and Tabellini (1994), show that the relationship across mixed country samples is if anything negative, confirm Perotti's (1996) finding that this relationship weakens or disappears when population structure (percent over age 65) is controlled for, and introduce two alternative theories of the distribution-transfer link that allow political influence to be a function of income.

JEL Classification: E61, O23, H21, H50, D31, D72