Finance Papers

Document Type

Journal Article

Date of this Version

9-2015

Publication Source

Research in Economics

Volume

69

Issue

3

Start Page

265

Last Page

290

DOI

10.1016/j.rie.2015.04.001

Abstract

This paper is a positive theory of the distribution of income and the growth rate of the economy. It builds on our earlier work (Meltzer and Richard, 1981) on the size of government. How does the distribution of income change as an economy grows? To answer this question we build a model of a labor economy in which consumers have diverse productivity. The government imposes a linear income tax which funds equal per capita redistribution. The tax rate is set in a sequence of single issue election in which the median productivity individual is decisive. Economic growth is the result of using a learning by doing technology, so higher taxes discourage labor causing the growth rate of the economy to fall. The distribution of productivity can widen due to an exogenous increase in technological specialization. This causes voters to raise the equilibrium tax rate and reduce growth. The distribution of pre-tax income widens. We calibrate the model using data from the U.S., U.K. and France. The results of the calibration show that the model is consistent with the facts about changes in income distribution over time in developed countries.

Copyright/Permission Statement

© 2015. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

income distribution, size of government, median voter theorem

Embargo Date

5-5-2017

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Date Posted: 27 November 2017

This document has been peer reviewed.