INEQUALITY, REDISTRIBUTION, AND RENT‐SEEKING

Abstract

This paper presents a non‐median voter model of redistribution in which greater inequality leads to lower redistribution. Bargaining between interest groups and politicians over exemptions implies that individuals with sufficiently high income will not pay taxes in equilibrium. Therefore, voters will set tax rates low enough so as to control the incentives for rent‐seeking. An increase in inequality, by putting more income in the hands of individuals that can buy exemptions, will lead to lower equilibrium redistribution. The model can be used to account for a negative relationship between inequality and growth and provides a new explanation of why the poor do not expropriate the rich in democracies.