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.
ENDS
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:
loukas.karabarbounis@chicagobooth.edu); or Romesh Vaitilingam on +44-7768-661095
(email: romesh@vaitilingam.com).