Soaking the Rich and the Poor? – An Empirical Investigation of Director’s Law

The theoretical analysis of redistributive policies is a corner-stone of modern political-economy research. A plethora of theoretical models have been developed during the last three decades predicting different directions of income redistribution in response to changes in inequality. While theories based on standard median voter models conjecture that in modern democracies income is redistributed from rich to poor, many “pork barrel politics”-models come to the conclusion that income redistribution favors the middle-classes at the expense of the rich and the poor alike – a result famously dubbed “Director’s Law”. While there is a large empirical literature testing the implications of the median voter models, there is hardly any cross-country research that tries to test the empirical validity of “Di-rector’s Law”. In this paper we set out to address this shortcoming. The aim is to provide a comprehensive, rigorous empirical test using panel data on 22 OECD countries over the time period of 1971–2005. Looking at the income share gains of different income deciles, we find strong evidence for “Director’s Law”: increases in income inequality result in redis-tribution from the richest and poorest 20 per cent of the income distribution towards the middle class