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 an 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 does not translate into higher redistribution. I empirically analyze the predictions of the model for a sample of 72 countries during the period 1960-2015. Using cross-sectional as well as panel estimation techniques, the results point to a positive relation between market inequality and the level of redistribution only when social mobility is relatively high.
E62, D31, J62, H26, P16
The Political Economy of Inequality, Mobility and Redistribution
KeywordsInequality, Social Mobility, Fiscal Policy, Tax Evasion