Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom

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Fiscal competition and economic freedom

Still a Director’s Law? On the Political Economy of Income Redistribution

By drawing on the median voter model, George Stigler (1970) provided a theoretical basis for the alleged empirical regularity found by Aaron Director that income redistribution runs from the poor and the rich to the middle classes. The median voter model is however only applicable to describe modern representative democracies under relatively strong and unrealistic assumptions, which makes alternative equilibria of income redistribution equally plausible.

In this paper, we survey the theoretical and empirical literature on the political economy of income redistribution with a particular focus on the more recent results from the comparative political economics literature. The comparisons between presidential and parliamentarian democracies, majoritarian and proportional representation systems, direct and representative democracy or federalism and Unitarianism are the most important distinctions to be looked at. In addition, we analyze the impact of these different institutions on income redistribution econometrically by drawing on three different data sets. In contrast to the largest part of the comparative political economics literature, we do however not measure income redistribution by particular spending programs or redistributive taxation, but instead by Gini coefficients which allow to focus on the income redistribution achieved by the state.

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