, and a net income of . taxation demanded by is greater than for since wants to tax 2/3 of all income by , L M L whereas only taxes 1/3 of all income (again, sets taxes equal to 0). This is the preference M H ordering assumed in Figure 1 in the main text. optimal transfer as a share of the net income of and (L’s transfer rate) is identical to L’s M H M’s optimal transfer rate from H: This completes the definition of preferences for each class. The next question is how political power shapes actual outcomes. If and share power the observed transfer ratio is a weighted average of the preferred levels M H by M and H: , is a weight that measures the political power of over (MH indicates that both and M H M H matter politically). we cannot observe we cannot identify , but we can test empirically whether the transfer rate,, responds to the relative income of and as opposed to who are in government. If the M H, democratic subversion thesis is correct, we should observe that , where are the observed relative pre-fisc incomes of and M H. In a model where the middle class is pivotal, as in the main text, the transfer rate is the preferred rate of As explained in the main text, but we can infer that in that case will be orthogonal to : M. . Note that this implication is stark because it means that even if top end inequality,rises, as it has in most countries, this should have no effect on the transfer rate, which will remain constant (ceteris paribus). Note also that this implication is contrary to the Meltzer-Richard model. The reason is that the M-R model implicitly assumes that the interests of and are aligned so that L M when income falls its preference for taxation rises. As soon as taxes and benefits can be M’s targeted, always wants to tax as much as it can and spend the proceeds on itself. M If government power matters (so the RDM applies) and M cannot govern on its own we need to derive the policy under different government coalitions. We assume such coalitions consist of at most two class parties. In the case of an coalition the bargain will lie between the optimal tax MH rate of (which is ) and the optimal tax rate of (which is 0): M H
, and a net income of . taxation demanded by L is greater than for M since L wants to tax 2/3 of all income by , whereas M only taxes 1/3 of all income (again, H sets taxes equal to 0). This is the preference ordering assumed in Figure 1 in the main text. L’s optimal transfer as a share of the net income of M and H (L’s transfer rate) is identical to M’s optimal transfer rate from H: This completes the definition of preferences for each class. The next question is how political power shapes actual outcomes. If M and H share power the observed transfer ratio is a weighted average of the preferred levels by M and H: , is a weight that measures the political power of M over H (MH indicates that both M and H matter politically). we cannot observe we cannot identify , but we can test empirically whether the transfer rate,, responds to the relative income of M and H, as opposed to who are in government. If the democratic subversion thesis is correct, we should observe that , where are the observed relative pre-fisc incomes of M and H. In a model where the middle class is pivotal, as in the main text, the transfer rate is the preferred rate of M. As explained in the main text, but we can infer that in that case will be orthogonal to : . Note that this implication is stark because it means that even if top end inequality,rises, as it has in most countries, this should have no effect on the transfer rate, which will remain constant (ceteris paribus). Note also that this implication is contrary to the Meltzer-Richard model. The reason is that the M-R model implicitly assumes that the interests of L and M are aligned so that when M’s income falls its preference for taxation rises. As soon as taxes and benefits can be targeted, M always wants to tax as much as it can and spend the proceeds on itself. If government power matters (so the RDM applies) and M cannot govern on its own we need to derive the policy under different government coalitions. We assume such coalitions consist of at most two class parties. In the case of an MH coalition the bargain will lie between the optimal tax rate of M (which is ) and the optimal tax rate of H (which is 0):
Elkjaer_Iversen_DPSA2018.docx