DP15793 Class Altruism and Redistribution

Author(s): Christian Ghiglino, David Juárez-Luna, Andreas Müller
Publication Date: February 2021
Keyword(s): altruism, Ethnic fragmentation, inequality, Probabilistic voting, redistribution, Social classes, social identity, Tax rate
JEL(s): D64, D71, D72, H20
Programme Areas: Public Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15793

Why do tax rates vary so much across countries? We study the role of other-regarding preferences and ethnic fragmentation in redistribution. The government of a two-party democracy is elected by altruistic voters and decides on a redistributive income tax. Social identification directs voters' altruism toward specific social groups. We identify three main factors that lead to low levels of redistribution in the political equilibrium: (i) strong in-group altruism of the rich voters---which we refer to as class altruism; (ii) weak universal altruism among all voters---in particular the rich; and (iii) ethnic fragmentation among poor voters. Using survey data, we document evidence on the pattern of altruism in the United States and the European Union and find that our model predictions are consistent with the observed differences in tax rates.