Working Paper: NBER ID: w22759
Authors: Marina Agranov; Thomas R. Palfrey
Abstract: We explore the effect of income mobility and the persistence of redistributive tax policy on the level of redistribution in democratic societies. An infinite-horizon theoretical model is developed, and the properties of the equilibrium tax rate and the degree of after-tax inequality are characterized. Mobility and stickiness of tax policy are both negatively related to the equilibrium tax rate. However, neither is sufficient by itself. Social mobility has no effect on equilibrium taxes if tax policy is voted on in every period, and tax persistence has no effect in the absence of social mobility. The two forces are complementary. Tax persistence leads to higher levels of post-tax inequality, for any amount of mobility. The effect of mobility on inequality is less clear-cut and depends on the degree of tax persistence. A laboratory experiment is conducted to test the main comparative static predictions of the theory, and the results are generally supportive.
Keywords: income mobility; tax persistence; redistribution; inequality
JEL Codes: C92; D3; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income mobility (J62) | equilibrium tax rate (H21) |
| tax persistence (H26) | equilibrium tax rate (H21) |
| tax persistence + income mobility (J62) | post-tax inequality (H29) |
| tax persistence + income mobility (J62) | equilibrium tax rate (H21) |
| higher income mobility with persistent tax rates (H31) | inequality (D63) |
| income mobility without tax persistence (J62) | inequality (D63) |
| observed tax rates (H29) | theoretically predicted tax rates (H29) |
| dynamic learning process (C69) | discrepancies between theoretical predictions and experimental outcomes (C90) |