Income Inequality, Redistributional Spending & Director’s Law – An Empirical Investigation

The link between income inequality and governmental redistribution is still subject to intense research and debate as it affects a wide range of issues in international and comparative political economy. Starting with the median-voter-hypothesis, a plethora of theoretical models have been developed dur-ing the last three decades to identify and explain possible causal relation-ships. The empirical evidence so far, however, has been mixed. The aim of this paper is to review the existing literature on inequality and redistribu-tion, to explicate the theoretical causal mechanisms identified so far, and to provide a comprehensive, rigorous empirical test that overcomes some of the shortcomings of previous empirical studies. It extends the literature by us-ing more precise measures of redistribution. Using panel data on 23 OECD countries over the time period of 1971–2005, we find robust evidence that income inequality is indeed associated with more redistribution. Most im-portantly, we find evidence for Director’s law: income is redistributed from the rich and from the bottom 20 per cent of the income distribution towards the middle class