Working Paper: CEPR ID: DP15793
Authors: Christian Ghiglino; David Juarez Luna; Andreas Müller
Abstract: Why do tax rates vary so much across countries? We study the role of other-regarding preferences and ethnic fragmentation in redistribution. The government of a two-party democracy is elected by altruistic voters and decides on a redistributive income tax. Social identification directs voters' altruism toward specific social groups. We identify three main factors that lead to low levels of redistribution in the political equilibrium: (i) strong in-group altruism of the rich voters---which we refer to as class altruism; (ii) weak universal altruism among all voters---in particular the rich; and (iii) ethnic fragmentation among poor voters. Using survey data, we document evidence on the pattern of altruism in the United States and the European Union and find that our model predictions are consistent with the observed differences in tax rates.
Keywords: altruism; social identity; tax rate; redistribution; inequality; ethnic fragmentation; social classes; probabilistic voting
JEL Codes: D64; D71; D72; H20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Strong ingroup altruism of rich voters (D64) | lower levels of redistribution (D39) |
| Weak universal altruism among all voters (D64) | lower levels of redistribution (D39) |
| Ethnic fragmentation among poor voters (J15) | lower equilibrium tax rates (H29) |
| Strong universal altruism (D64) | higher levels of redistribution (H23) |
| Class altruism (D64) | lower levels of redistribution (D39) |