Media Briefings

'One Dollar, One Vote': New Evidence That Income Inequality Matters For Redistribution

  • Published Date: June 2011

New research indicates that income inequality has a significant impact on the degree of redistribution that a country pursues. Analysing more than 25 years of data on a selection of OECD countries, Professor Loukas Karabarbounis finds that societies with a more affluent rich and middle class are less redistributive – and societies where the poor become relatively richer choose to have greater redistribution.

His study, published in the June 2011 issue of the Economic Journal, describes these findings as a ‘one dollar, one vote’ explanation of redistribution. This starts with the idea that money is associated with more political power, and that different groups of voters have conflicting goals on the redistribution of incomes. Therefore, when a group of voters becomes richer, redistributive policy tilts closer to this group’s preferred policy.

The findings have important implications for the likely shape of fiscal consolidation following the global financial crisis. In conjunction with various demographic factors, including immigration and an ageing population, the huge imbalances that emerged during the crisis are forcing many countries to undertake large budget adjustments.

The type of adjustment that each country will follow undoubtedly depends on the redistributive implications of the potential fiscal policies: cutting spending mostly hurts the bottom of the income distribution while increasing taxes mostly hurts the top. The ‘one dollar, one vote’ explanation of public spending predicts that the burden of fiscal adjustment will be borne by the groups of voters whose income and political power deteriorated the most as a result of the global financial meltdown.

The evidence suggests that if the rich have become relatively richer, redistribution is likely to decrease: this is in line with the preferences of the rich, who are the people who pay more taxes under a progressive tax system. But if the poor have become relatively richer, redistribution will increase: this is in line with the preferences of the poor, who benefit more from increased transfers such as unemployment insurance.

These contrasting outcomes are exemplified by the period from 1980 to 2001, when the growth of public spending on redistribution in certain European countries exceeded the growth of public spending on redistribution in the United States by 2.7%. Professor Karabarbounis’s research suggests that this difference emerged because the rich became much richer in the United States relative to their counterparts in Europe.

His empirical analysis of data from a group of OECD countries indicates a large effect of various inequality indices on redistribution:

  • A 10% increase in the gross earnings of the rich (relative to average earnings) reduces the redistribution-to-GDP ratio by 2.25 percentage points.
  • A 10% increase in the relative earnings of the median is associated with a 3.05 percentage point decrease in the redistribution-to-GDP ratio.
  • A 10% increase in the relative earnings of the poor is associated with a 2.14 percentage point increase in the redistribution-to-GDP ratio.

These estimates take account of all persistent political, cultural or geographical factors that may cause some countries to redistribute more than others irrespective of differences in their income distributions.

Many economists and other social scientists have tried to explain why some countries redistribute a larger fraction of their income relative to other countries. As various studies have documented, the current consensus is that the pre-tax-and-transfer distribution of income is not a key determinant of redistribution.

But these studies have looked at one dimension of income inequality at a time. Instead, the ‘one dollar, one vote’ explanation argues that since money is associated with more political power and since redistribution responds to the political demands of various groups, the effect of inequality on redistribution depends on what part of the income distribution is changing.


Notes for editors: ‘One Dollar, One Vote’ by Loukas Karabarbounis is published in the June 2011 issue of the Economic Journal.

Loukas Karabarbounis is at the University of Chicago, Booth School of Business.

For further information: contact Loukas Karabarbounis on +1-773-834-8327 (email:; or Romesh Vaitilingam on +44-7768-661095 (email: