DP998 The Dynamics of Exclusion and Fiscal Conservatism

Author(s): Gilles Saint-Paul
Publication Date: July 1994
Keyword(s): Exclusion, Human Capital, Income Distribution, Inequality, Path Dependence, Political Economy, Poverty
JEL(s): E62, H2, H3, J24, J62, O15
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=998

This paper studies the impact of income inequality on fiscal conservatism when an increase in inequality affects the bottom portion of income distribution. It is argued that, contrary to what is generally assumed in the economic literature, inequality will then be associated with less, rather than more, redistributive taxation. Furthermore, if the poor are liquidity constrained then the positive association between inequality and fiscal conservatism will increase the persistence in the dynamics of income distribution and possibly lead to multiple steady states. The existence, under some conditions, of a dynamic voting equilibrium is shown and some of its properties are studied.