One Dollar, One Vote

This article revisits the relationship between inequality and redistribution in a panel of advanced OECD countries. Using panel data methods that hold constant a variety of determinants of redis-tributive spending, I find a non-monotonic relationship between pre-tax-and-transfer distribution of income and redistribution. Relative to mean income, a more affluent rich and middle class are associated with less redistribution and a richer poor class is associated with more redistribution. These results are consistent with a one dollar, one vote politico-economic equilibrium: when the income of a group of citizens increases, aggregate redistributive policies tilt towards this group’s most preferred policies. What determines the amount of resources that societies redistribute between their members? The current consensus in the literature, summarised in Persson and Tabellini (2003) and Alesina and Glaeser (2004), is that the pre-tax-and-transfer distribution of income is not a significant determinant of redistribution. The striking contrast between the US and Europe illustrates this ‘paradox of redistribution’. The two workhorse models of distribution and redistribution, the normative model of Mirrlees (1971) and the positive theory of Meltzer and Richard (1981), in general predict tha