Working Paper: CEPR ID: DP7501
Authors: Roel Beetsma; Alex Cukierman; Massimo Giuliodori
Abstract: The paper presents evidence of an upward ratchet in transfers and taxes in the U.S. around World-War II. This finding is explained within a political-economy framework involving an executive who sets defense spending and the median voter in the population who interacts with a (richer) agenda setter in Congress in setting redistribution. While the setter managed to cap redistribution in the pre-war period, the War itself pushed up the status-quo tax burden, raising the bargaining power of the median voter as defense spending receded. This raised the equilibrium level of redistribution. The higher share of post-War transfers may thus be interpreted as a delayed fulfilment of a, not fully satisfied, popular demand for redistribution inherited from the Great Depression.
Keywords: Agenda Setter; Ratchets; Redistribution; Taxes; Transfers; World War II
JEL Codes: E62; E65; N11; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decrease in defense spending (H56) | Increase in bargaining power of median voter (D72) |
| Increase in bargaining power of median voter (D72) | Higher equilibrium level of redistribution (D50) |
| Upward ratchet in transfers (H87) | Increase in federal transfers (H77) |
| Upward ratchet in taxes (H29) | Increase in federal transfers (H77) |
| Reduction in defense expenditure (H56) | Increase in federal transfers (H77) |
| WWII (N44) | Increase in federal transfers (H77) |
| WWII (N44) | Growth in transfer payments (H59) |