Income inequality, voters' support for public spending and the size of the welfare state: A simple political model

Abstract

This paper studies the effect of income inequality and voters’ support for public spending on the choice of size of the welfare state. Based on new empirical findings showing that preferences for taxation depend on the nature of the policies financed with tax revenues (Barnes 2015, Ballard-Rosa 2016, Roosma 2016, and Berens 2019) I build a Downsian two-party political competition framework in which voters differ in both income (rich or poor) and ideology (liberal or conservative). Government provides two types of public services: one that increase the size of the welfare state and other that does not. Liberal (conservative) voters only care about the public service that increase (do not increase) the size of the welfare state. I find that the decisive voter and the size of the welfare state depends on both the level of income inequality and voters' support for public spending. In particular, and different from the traditional models on redistributive politics (Romer 1975, Roberts 1977, and Meltzer 1981), I obtain that an increase in pre tax income inequality may reduce the size of the welfare state chosen by majority voting.