Redistributive Taxation with Endogenous Sentiments

• Authors: Joan-Maria Esteban.
• BSE Working Paper: 1254 | September 15
• Keywords: redistribution , inequality , social contract , Endogenous Sentiments , Social Norms , Politico-Economic Equilibrium
• JEL codes: D64, D72, Z13, H3, J2
• redistribution
• inequality
• social contract
• Endogenous Sentiments
• Social Norms
• Politico-Economic Equilibrium

To help explain differences between the US and EU “social contracts” as well as other cultural differences, we present a model of rational voting over redistribution where individual attitudes toward others are endogenously determined. Individuals differ in their productivities and their degree of social concern, and their behavior is influenced by moral standards. According to these, agents determine what they take to be proper behavior, here identified with the average labor supply, and they judge others accordingly. They increase their esteem for those who perform in excess of the norm and decrease their esteem for those who work less. This pertains to their self-esteem as well, which varies in relation to their own performance. Attitudes toward others influence the desired extent of redistribution. There are multiple politico-economic equilibria. In one equilibrium all individuals conform to proper behavior, their esteem for others is not biased towards any particular type, and the majority vote for high redistribution. In the other equilibrium, highly skilled workers work above the mean and are admired by everyone, while unskilled workers are considered lazy. Here, the majoritarian vote supports low redistribution. We contrast the US and EU social contracts in light of the predictions of the model.