Working Paper: NBER ID: w9186
Authors: Wojciech Kopczuk; Joel Slemrod; Shlomo Yitzhaki
Abstract: An optimal linear world income tax that maximizes a border-neutral social welfare function provides a drastic reduction in world consumption inequality, dropping the Gini coefficient from 0.69 to 0.25. In contrast an optimal decentralized (i.e., within countries) redistribution has miniscule effect on world income inequality. Thus, the traditional public finance concern about the excess burden of redistribution cannot explain why there is so little world redistribution. Actual foreign aid is vastly lower than the transfers under the simulated world income tax, suggesting that countries such as the United States either place a much lower value on the welfare of foreigners or else expect that a very significant fraction of cross-border transfers is wasted. The product of the welfare weight and one minus the share of transfers that are wasted constitutes an implied weight that the United States assigns to foreigners. We calculate that value to be as low as 1/2000 of the value put on the welfare of an American, suggesting that U.S. policy implicitly assumes either that essentially all transfers are wasted or places essentially no value on the welfare of the citizens of the poorest countries.
Keywords: foreign aid; global inequality; income tax; redistribution
JEL Codes: F35; H21; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| perceived efficiency costs of redistribution + valuation of foreign welfare (D61) | levels of actual aid provided (F35) |
| optimal linear world income tax (H21) | global consumption inequality (F61) |
| decentralized redistribution within countries (H77) | overall world income inequality (D31) |
| valuation of foreign welfare (I38) | actual foreign aid provided (F35) |
| expectation of waste in transfers (L99) | actual foreign aid provided (F35) |