Still a Directors Law On the Political Economy of Income Redistribution Presentation at the IBLIREF

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Still a Directors Law?On the Political Economy
of Income Redistribution Presentation at the
IBL-IREF Conference on Troppe tasse ma a
vantaggio di chi, Milan, June 18, 1007

• Prof. Dr. Lars P. FeldUniversity Heidelberg,
  ZEW Mannheim, University of St. Gallen
  (SIAW-HSG), CREMA Basel and CESifo Munich

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Still a Directors Law? Outline of the
Presentation

• Directors Law Properly Taken
• The Political Economy Rationale
• Income Redistribution and Constitutions
• Some Descriptive Evidence
• Econometric Results
• Conclusions

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Directors Law Properly Taken

• Does income redistribution by the state run from
  rich to poor or from both, rich and poor to the
  middle income classes?
• Public expenditures are made for the primary
  benefit of the middle classes, and financed with
  taxes which are borne in considerable part by the
  poor and the rich. (Stigler 1970, p.1)
• All public expenditure needs to be considered.
• Education, cultural spending and so on.
• All public revenue needs to be considered.
• A question of budget incidence Fiscal residuum

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The Political Economy Rationale (1)

• The median voter model.
• Middle classes are always part of the minimum
  winning coalition.
• The simple version already only holds with one
  dimensional decisions and single peakedness.
• Under multi-dimensionality it is always better
  for the middle income classes to include a poor
  household than a rich household in the coalition.
• Exploitation of the rich.
• Directors Law proper The middle and the poor
  coalesce against the rich.

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The Political Economy Rationale (2)

• Meltzer and Richard (1981)
• The higher the gap between mean and median
  income, the more redistribution is undertaken.
• Increase in skewness towards high income earners.
• Romer-Roberts
• Regressive taxation, if the median income
  taxpayer is sufficiently productive.
• Limits of redistribution as taxpayers avoid
  taxation and transfers pose adverse incentives.

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The Political Economy Rationale (3)

• Political participation and voter turnout
• High income earners participate more in politics.
• Private provision of public goods
• Potentially also a coalition of rich and poor
  against the middle classes.
• Non-linear taxes
• Rich and the middle classes against the poor.
• Voluntary income redistribution
• More important within social or ethnic groups.
• But also Targeted spending.

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The Political Economy Rationale (4)

• Poorly informed voters and probabilistic voting
• Pork-barrel politics as a different kind of
  targeting.
• Special interest politics.
• Difficult to predict a Directors Law.
• Ideology may induce a Directors Law
• The economic interests of the rich and the poor
  are closely entangled with their ideologies.
• The middle classes are politically much more
  mobile and will benefit from electoral platforms
  framed in their interests.

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Income Redistribution and Constitutions (1)

• Direct vs. Representative Democracy
• Political decision are more in line with median
  voter interests.
• Speaks for validity of Directors Law in direct
  democracy.
• But Issue unbundling via citizen intiatives.
• Like in the private provision of public goods,
  more targeted spending.
• Less redistribution towards the middle income
  classes.

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Income Redistribution and Constitutions (2)

• Presidential vs. Parliamentarian Systems
• Head of parliamentary regime has additional
  bargaining power vis-à-vis the legislature.
• Confidence vote and career concerns.
• Presidents at times of divided government need to
  ensure a broad majority in the legislature.
• Representatives from different electoral
  districts are in charge of agenda-setting in
  committees on taxing and spending.
• More targeted spending and lower taxes in
  presidential systems.

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Income Redistribution and Constitutions (3)

• Plurality rule vs. Proportional Representation
• Spending targeted to districts under plurality
  rule
• Proportional representation is associated with
  multi-party parliaments and the need to form
  coalition governments with more or less diverse
  interests.
• A government needs to win the support of 50 plus
  one voter it needs to rest on a wider basis
  than in the case of plurality rule.
• Broader expenditure programs and in the case of
  income redistribution more general transfer
  schemes under proportional representation.

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Income Redistribution and Constitutions (4)

• Federalism vs. Unitarianism
• Who migrates in competitive federalism?
• If it is the middle classes, Directors Law
  obtains.
• If it is the high income earners, Directors Law
  is restricted.
• Summarizing hypotheses
• Direct democracy Theoretically open.
• Presidential systems and plurality rule more
  difficult to realize Directors Law.
• Competitive federalism Mobile high income
  earners restrict Directors Law.

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Some Descriptive Evidence (1)
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Some Descriptive Evidence (2)
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Some Descriptive Evidence (3)

• No clear-cut results from the descriptive data
• Early evidence from the 1970s on budget
  incidence supporting Directors Law.
• But Strong assumptions as to the incidence of
  particular spending categories.
• Evidence supporting Meltzer-Richard.
• Democracy leads to more redistribution.
• Plurality rule leads to less welfare spending.
• Presidential systems have less welfare spending.

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Econometric Results (1)
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Econometric Results (2)
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Econometric Results (3)
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Econometric Results (4)
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Econometric Results (5)
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Econometric Results (6)
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Econometric Results (7)
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Econometric Results (8)
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Econometric Results (9)
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Conclusions

• Does redistribution follow a Directors Law?
• Arguments from the political economy of income
  redistribution do not allow to draw that
  conclusion Too diverse arguments.
• Descriptive evidence also ambiguous.
• Evidence on budget incidence Not reliable.
• Presidential systems less welfare spending and
  more unequal distribution of disposable income.
• Plurality systems less welfare spending, but no
  significant effect on income distribution.

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Conclusions

• Direct democracy
• lower welfare spending
• lower broad-based taxes
• less income redistribution only when primary
  income distribution not too unequal.
• Fiscal competition
• Restrictions on Directors Law
• Occurrence of Directors Law depends on the
  political system in place.

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