Inequality, voting over public consumption, and growth

Abstract

As has been extensively discussed in the preceding chapters, growth models linking the income distribution and the size of the government are based on majority voting. According to these models, inequality is positively related to the size of the government (due to the demand for redistribution policies) and taxation depresses growth. Whether or not taxation empirically has a negative and significant effect on growth is controversial. Whereas Easterly and Rebelo (1993), Perotti (1996) and Figini (1999) find ambiguous results, Kneller, Bleaney and Gemmell (1999) suggest that when `productive’ public expenditure like infrastructure or education expenditure is controlled for, the ratio of the total tax revenue to GDP negatively affects growth. (See chapter 1, section 1.4 for further evidence and discussion). However, the notion that a negative relationship between income inequality and growth works through the politico-economic channel is not at all confirmed by the data [e.g. Perotti (1996), Figini (1999)].¹ Also without considering growth, the empirical evidence for the hypothesis that a more unequal income distribution leads to higher redistributive government spending [see e.g. Meltzer and Richard (1981) for a theoretical model] is, at best, mixed.²

For further empirical evidence and discussion, see the recent paper by Basett, Burkett and Putterman (1999).

Whereas Meltzer and Richard (1983) provide some time-series evidence for the U.S. in favor of their theory, Lybeck (1986) rejects the hypothesis for Sweden. In cross-country studies, Mueller and Murrell (1986) find some weak support, but Kristov, Lindert and McClelland (1992) even find that a lower median to mean income ratio reduces redistribution.