Why the Weak Relationship Between Income Inequality and Redistribution Efforts?

Asking good questions is half the battle in advancing knowledge, and a clever and timely piece by Andreas Georgiadis and Alan Manning of the London School of Economics does just that.

The post looks into why rising income inequality isn’t strongly correlated in democracies with more concerted efforts at redistribution. After all, as wealth becomes concentrated in fewer hands, the have nots, who outnumber the top echelon in considerable numbers, will have both the incentive and the means to vote for policies that make the after-tax distribution of income less skewed.

The post by Georgiadis and Manning makes an interesting first cut into the problem. It looks at the relationship between income inequality in the UK from 1974 to 2004, a period during which the disparity in earnings grew sharply, and social attitudes towards redistribution. Although there was a time from the mid 1980s to the mid 1990s when the desire for redistribution increased, over the long haul it has declined dramatically. The authors offer some theories, the most persuasive being that rising inequality give the rich the means to fight off demands for reallocation (ie, they are better able to manipulate public opinion).

From VoxEU:

The standard framework for thinking about inequality and redistribution – the median voter approach – predicts that rising inequality should produce more redistribution. The facts reject this prediction for the UK and suggest that beliefs may be an important missing factor.

“I warn you that there are going to be howls of anguish from those rich enough to pay over 75% on their last slice of earnings”, a gleeful Denis Healey, Labour Party Shadow Chancellor, 1973.

“The justice for me is concentrated on lifting incomes of those that don’t have a decent income. It’s not my burning ambition to make sure that David Beckham earns less money”, Tony Blair, Labour Party Leader, 2001 Election Campaign.

One of the main activities of the state in democracies is to redistribute resources. The most common explanation for why the state gets involved in this activity is that the distribution of income is skewed with small numbers of large incomes so that average income is above median income. In simple models of democracy, it is the median voter who is decisive and the government effectively does what they want, and they will typically want to redistribute resources from the rich to themselves. More sophisticated models of democracy also tend to have the same prediction. According to this view, a rise in income inequality will lead to more redistribution as the median voter tries to get a slice of the extra pie going to the rich.

However this prediction about the relationship between inequality and redistribution does not fare so well when confronted with data. Perhaps the starkest comparison is between the United States and Europe. The United States has higher levels of inequality than Europe and less redistribution, the opposite of the views sketched above. (See Alesina, Glaeser and Sacerdote, 2001, for a good discussion of this comparison).

However, there are many other potential differences (e.g. racial divisions and the political system) between countries that muddy the link between income inequality and redistribution. While the existing studies do make serious attempts to control for these confounding factors, it is very difficult to do this in a way that is beyond reasonable criticism.

However, it is not just across countries but also over time that we see changes in inequality. Looking at how redistribution in a country responds to changes in inequality has the potential advantage that many factors that might be thought to be relevant to redistribution (e.g. the political system) are held constant so we might hope to get a better estimate of the impact of inequality on redistribution. That was the purpose of our research on the relationship between inequality and redistribution in the UK.1

The UK is a good country to consider because it has had large rises in pre-tax income inequality that are generally thought to be the result of the exogenous forces of technological change and globalisation. In particular, there has been a large rise in the share of pre-tax income going to those at the top of the income distribution. As discussed above, most models of the political process used by economists would predict that the political response to this would take the form of rising redistribution with rising marginal tax rates on the rich. But we show that this has not happened. In our research, we use a sophisticated way to arrive at this conclusion but the simplest way to see it is that the top rate of income tax fell from 83% in the late 1970s to 40% in 1988 since when it has not changed. There is now no major political party proposing rises in the top marginal rate of income tax.

Why has the rise in UK inequality been met with so little demand to increasing taxes on the rich? One possibility is that the models of the political process used by economists are all wrong. For example, if our democracy is closer to ‘one pound, one vote’ instead of ‘one person, one vote’ then a rise in the share of income going to the rich will also lead to a rise in their share of political power, hence potentially explaining the lack of a redistributory response. But it is also possible that other factors have been changing.

To investigate this we used data from the British Social Attitudes Survey to see whether attitudes towards redistributive taxation have been changing. The answer is that they have. The figure below shows the average response of individuals to the statement “government should redistribute income from the better-off to those that are less well-off” where a 1 represents strongly disagree and 5 strongly agree so that higher average values represent a greater demand for redistribution.

From the figure it can be seen that the demand for redistribution fell in the early 1980s but then rose from the mid 1980s to the mid 1990s. This was the period in which inequality grew fastest and it seems plausible to argue that the lack of redistribution by the Thatcher and Major governments was not particularly popular. Hence Tony Blair would seem to have inherited in 1997 a large unmet demand for redistribution. But, little happened to actual inequality or redistribution but the support for redistribution plummeted to the lowest level available. The bottom line is that inequality now is much higher than in the 1970s but the demand for redistribution is much lower.

Why the change?

Why might people’s attitudes to redistribution have changed so much? There are a number of possible explanations. First, if you care a lot about the poor or are very envious of the rich, it is quite likely that you support a lot of redistribution. Secondly, if you believe that high taxes discourage work then you are not likely to support much redistribution. If you think the government cannot be trusted you are less likely to support redistribution. We find evidence for all these predictions using the British Social Attitudes Survey as well as the standard prediction that the rich favour less redistribution than the poor.

But have any of these attitudes been changing over time? Our conclusion is over the last 10 years that changing attitudes towards incentives and changing attitudes towards the rich (fewer people now believe there is one law for the poor and one for the rich or that big business benefits owners at the expense of workers) can explain almost two-thirds of the decline in the demand for redistribution in the UK.

One way to summarise this conclusion is that what people believe is as important as the objective economic circumstances in explaining people’s attitudes to political issues like redistribution. And these beliefs can change fast. Such a conclusion is perhaps only a potential surprise to economists as it simply says that politics is a battle for ‘hearts and minds’. But where those beliefs come from is itself an interesting question that we cannot answer very easily – it may be that they themselves are a product of the economic fundamentals. For example it could be that the rise in inequality gives the rich more power to fight off demands for redistribution and the way in which they do this is to put resources into persuading people that incentives are very important or that big business is not all bad. The determinants of what people believe is an area where economists are only beginning to focus their attentions.

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  1. newsman

    I don’t think it’s a simple matter of the rich convincing the poor that conservative ideology is best. Not many poor people believe that even today.

    The real political power is in the hands of the middle class–upper middle, middle middle and lower middle. At this point in history, all these people are afraid of losing what they have–not aspiring to have more. They don’t care about income distribution charts. They know they have a pretty good life–but they don’t feel that their lives are economically secure. (They have good reasons for feeling that way, IMO)

    That makes them susceptible to fear-based politics: Liberals are going to tax you to death and give your money to shiftless, lazy people. Environmentalists are going to shut down the factory where you work. Illegal aliens are going to take your job and make your children learn Spanish. Islamofascists are going to blow you up. Homosexuals are going to…Well, you get the idea.

    If some of you people are right, and we do enter a period of economic hardship, it will be interesting to see how middle class psychology reacts. Whatever the actual economic benefits of his program, FDR had the psychology part right: “We have nothing to fear but fear itself.”

    MY fear is that economic hardship will put middle America’s existing portfolio of fears on steroids, with potentially devastating results for foreign policy, domestic freedom–and also the economy.

  2. Anonymous

    Why the inequality? Ask Edward Bernays.

    In the USA the poor often squander their meager resources on lottery tickets. If they were to win and become wealthy they certainly wouldn’t want heavy taxation. People here, for good or ill, view wealthy people as lottery winners. To tax them would be to tarnish the dreams of the poor as they buy their tickets.

    Lotteries are the modern day opiate of the poor. A promise of equitable distribution of income doesn’t have a comparable kick. No poor person would believe it could happen – government is seen as distant and corrupt. Meritocracy is long gone. Getting ahead is not about justice or merit but simply luck of the draw.

    As the commenter before me points out, the middle class is too busy protecting its endangered lifestyle to be banging about for higher taxes on the rich. The middle class, no less than the poor, aspires to wealth. Higher taxes on the wealthy would likely impinge upon the upper middle classes as well.

    The booger in the mushroom soup of even wealth distribution is the criteria for dispensation. We know how our Congress handles such handouts – pork barrel politics.

    And we know how much pork is in that can of Pork and Beans for the poor. As my dad used to say – they just ran a pig through the pot and you hope none of him remains behind.

  3. newsman

    I think it’s a myth to believe that poor and middle class people identify with the wealthy and espouse low-tax policies for that reason. I think that’s a myth perpetrated by conservatives–that the poor and middle class cherish aspirations to wealth. (Some of them do, obviously, but they are not representative.)

    I’m lower-middle-class myself, and in my work as a newspaper reporter, I get to meet lots of people in my income group, and below.

    Generalizing from my experience: The poor are just struggling to get by. They tend to be cynical, with no faith that the government is likely to do much for them other than put them in jail if they get out of line. They never write their congressmen.

    The middle class is often cynical as well, resentful of both the government and corporate America. They feel they are the victims of various kinds of profiteering. At the macro level, they feel as though they are being gouged for gas and other necessities by corporations aided and abetted by government. At the micro level, they often believe that local governments are in cahoots with real estate developers to permit or even promote developments that hurt the value of their homes. They also believe the press is covering all this up, and is part of the vast conspiracy to exploit them. They vote their fears, not their dreams. They no longer have any vision of social justice. To them, social justice just means higher taxes on them, a reduction in their living standards to provide handouts to the undeserving, while the rich keep getting richer.

  4. john c. halasz

    I don’t know the technical term for this quite common effect in polling results, though it amounts to a form of (mis)attribution bias, and operates across all kinds of issues, but my favorite example is this one: 19% of a sample of Americans surveyed thought they were in the top 1% of income distribution.

  5. Anonymous

    The authors are wrong, because there WAS a profound change in the political system, in 1976. Nobody talks about it, but you may be able to read between the lines here:

    AFTER that change the man quoted, Denis Healey, became one of the leading lights at Bilderberg. No more pips squeaking!

    And the definitive quote that represents that change was not Blair about Beckham. It was Peter Mandelson, who said in 1997 that New Labour was “totally relaxed about people becoming filthy rich”.


  6. newsman

    In the US the political climate shifted in 1980 with the Reagan ascendancy, a political climate that we live in still.

    At the end of a troubling period (civil rights, Vietnam, Watergate) that filled people with doubt about the future, and caused many to question their basic assumptions about their country and their government, Reagan swept in with his sunny “morning in America” message, telling everyone to stop worrying (stop thinking?) and feel good about themselves and their affluence.

    We were encouraged to think of ourselves as consumers rather than citizens, and that has only gotten worse since Reagan. Remember Bush, urging us to defy Osama bin Laden by going shopping? And hardly anyone was offended by that. He got snickers and sneers from the intellectual elite, but everyone else apparently did as they were told.

    Can you imagine FDR saying that after Pearl Harbor? Churchill during the Blitz?

    I suspect we’ve moved into a time of decadence as a civilization, when the “American Dream” is about consumption, and not any other kind of civic virtue.

    What could change that? What could reverse the trend? If not 9/11, what?

    Perhaps–just perhaps–a major downward lurch in our economy. The whole credit bubble that is a focus of this blog is all about wealth transfer. As consumers, our appetites have exceeded our means, so we borrow to feed those appetites. That means that significant sums of our wealth are being transferred to those with money to lend.
    But in the meantime, we have a lot of nice stuff that makes us feel rich, so why complain about the economic order?
    If this whole credit scheme breaks down–or just slows down–will peoples’ political outlook change, and if so, in what way? We may be about to find out.

  7. jason

    How much does a basic collective action problem account for this phenomenon? Rich folks will fight harder (and use their increased influence) in a more concerted way.

  8. Anonymous

    I don’t know how this plays out in British politics, but the impact of racism on redistributionist policies in the United States can’t be overestimated.

    We forget now that welfare rights was a powerful component of the civil rights movement, but it was. In many states, minorities (particularly and especially blacks) were functionally barred from collecting government benefits. Single parents of illegitimate children were also excluded, as were the children themselves. The civil rights movement fought for access to government benefits on redistributionist grounds.

    Then came the pushback against welfare. It’s no accident Reagan demonized welfare by using the image of a single black mother to tap directly into the racist lizard brain. Nor is it an accident that former Jim Crow states provide the lowest levels of government benefits in the U.S., even though poverty among whites in those states is higher than other parts of the country. It’s not like the 60s were that long ago — there are plenty of people still alive today who grew up in a society that had separate bathrooms and drinking fountains.

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