Abstract: How does the interaction between inequality and social mobility affect the choice of fiscal policy? I analyze this question in a model of democratic politics with imperfect tax enforcement, where the ability of individuals to evade taxes limits the amount of redistribution in the economy. Social mobility creates an insurance motive that increases voluntary compliance, favoring the tax enforcement process. In such a environment, redistributive pressures brought about by an increase in inequality are only implementable in highly mobile societies. On the contrary, when mobility is low, higher inequality reduces tax rates and redistribution. I empirically test this prediction with a panel of 26 countries for the period 1960-2012, using data on market and net inequality as measured by the Gini coefficients before and after taxes, and data on intergenerational income elasticity to measure social mobility. I find a strong positive relation between inequality and redistribution for countries with relatively high levels of social mobility: around 80% of an increase in pre-tax inequality is offset by higher redistribution. This effect dissipates in countries with low levels of mobility.
Ignacio Campomanes is a doctorate student at the University of Navarra.