Public Economics Analysis: OECD Countries, Income & Redistribution

This report analyzes the relationship between income inequality and redistribution, primarily focusing on the work of Karabarbounis (2011), which examines OECD countries. The analysis delves into the non-monotonic relationship between pre-tax-and-transfer income distribution and redistribution, hi...Read More

Public Economic

The article given by Karabarbounis (2011) has mainly revisited the relationship between
inequality and the redistribution in a panel of advanced Organization for Economic Cooperation
and Development (OECD) countries. By using this panel data method, which holds constant
variety of redistributive spending determinants, it has been identified by author that there is a
non‐monotonic relationship among pre‐tax‐and‐transfer income distribution and redistribution.
In other words, relative to mean income, where more wealthy rich as well as middle class group
are mainly associated with less redistribution, while richer poor class are with more
redistribution. So, these outcomes are consistent in terms of one dollar, one vote kind of politico‐
economic equilibrium. It states that when income of a particular group of citizens gradually
increases, then aggregate redistributive policies used to tilt towards the group's most preferred
policies. These aspects emphasise on determining amount of resources which societies
redistribute among its members, where literature summarises that pre-tax-and-transfer income
distribution is not considered as significant redistribution’s determinant. So, it illustrates about
paradox of redistribution, by applying Mirrlees’ (1971) normative model and positive theory of
Richard and Meltzer (1981). It states about prediction that higher inequality in income leads to
create more redistribution. But in real manner, more pre-tax-and-transfer unequal in nations like
US would be less to OECD countries (Europe).
On contrast of these conventional views, it has been argued by author that if nations
introduce the multiple inequality of income statistics within same empirical framework, then
there will be no paradox of redistribution. Along with this, interpreting the same statistical
information in terms of outcomes of political equilibrium as one dollar, one vote then it will also
lead to eliminate paradox. In this regard, determining and and measuring inequality of income
with three main variables, motivate for interpreting the cross-country redistribution differences.
The inequality at bottom of distribution of income is given in terms of ratio of gross earning to
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mean gross earing of the worker as (yk/y¯). As each income group has conflicting goals, with
respect to redistribution of amount of resources, therefore, it states income is highly correlated
with different measures of political participation. In this sense, single inequality statistics like
distance of median from mean income, is unlikely accounts for overall conflicting preferences, in
terms of welfare state’s size. Therefore, if political influence will increase as per income, then it
is expected that effect of such inequality on the redistribution will vary, depends upon changes of
income distribution in a particular part. Through various political economy models based on
inequality, it has been assumed by author that “decisive voter”— a person whose preferences can
tilt the decision one way, seems to be much richer than “median income voter.” Hereby, political
decisions also would then coincide more towards preferences of a group of rich citizens. In this
regard, it has been analysed that political systems are moved from traditional “one person, one
vote” model to “one dollar, one vote”. Henceforth, to reduce inequalities, it is essential for
nations to reduce income inequalities of redistribution.
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