Income Tax

European Economic Review 48 (2004) 805 – 826 www.elsevier.com/locate/econbase

Income distribution and tax structure: Empirical test of the Meltzer–Richard hypothesis
Lars-Erik Borge, J rn Ratts
∗
Department of Economics, Norwegian University of Science and Technology, Dragvoll University Campus, Trondheim N-7491, Norway Received 17 March 2002; accepted 24 September 2003

Abstract The Meltzer–Richard hypothesis that more unequal income distribution will create a majority for more redistribution has generated much research, but little empirical support. The empirical literature has concentrated on cross-country studies and the size of the public sector, and the results broadly do not indicate more redistribution with more inequality. This analysis suggests that the hypothesis should be investigated in a more homogenous setting with comparable institutions and with an explicit decision about redistribution (here tax structure). New data on poll tax and property tax in decentralized government in Norway are exploited. We show how the multi-dimensional decision can be analyzed as majority rule assuming intermediate preferences. In the econometric analysis, instruments are used to account for endogeneity of income level and income distribution. The estimated model supports the understanding that more unequal income distribution implies a shift in the tax burden from poll tax to property taxes and thereby gives more redistribution. c 2003 Elsevier B.V. All rights reserved.
JEL classiÿcation: H23; H71 Keywords: Income distribution; Tax structure

1. Introduction When the median voter has less income than the mean, the typical income distribution observed, the decisive median voter will apply income taxation for redistribution. This is the key insight of Meltzer and Richard (1981). More uneven income distribution is associated with more redistribution, only held back by negative incentives to work and save. The setup assumes proportional income taxation ÿnancing... [continues]

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