Fairness and Redistribution

Different beliefs about the fairness of social competition and what determines income inequality influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how the interaction between social beliefs and welfare policies may...

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Bibliographic Details
Published in:The American economic review 2005-09, Vol.95 (4), p.960-980
Main Authors: Alesina, Alberto, Angeletos, George-Marios
Format: Article
Language:English
Subjects:
Beliefs
Bequests
Competition
Economic theory
Economics
Fairness
Fiscal policy
Income determination
Income distribution
Income inequality
Income redistribution
Income taxes
Perceptions
Redistributive taxation
Society
Studies
Tax policy
Tax rates
Taxation
Taxation economics
Welfare economics
Welfare policy
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Summary:Different beliefs about the fairness of social competition and what determines income inequality influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how the interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will choose low redistribution and low taxes. In equilibrium, effort will be high and the role of luck will be limited, in which case market outcomes will be relatively fair and social beliefs will be self-fulfilled. If, instead, a society believes that luck, birth, connections, and/or corruption determine wealth, it will levy high taxes, thus distorting allocations and making these beliefs self-sustained as well. These insights may help explain the cross-country variation in perceptions about income inequality and choices of redistributive policies.
ISSN:0002-8282
1944-7981
DOI:10.1257/0002828054825655