Essays in Political Economy

Abstract

How does the interaction between inequality and social mobility affect the choice of fiscal policy? I analyze this question in a model of democratic poli- tics with imperfect tax enforcement, where the ability of individuals to evade taxes limits the amount of redistribution in the economy. Social mobility creates an insurance motive that increases voluntary compliance, favoring the tax enforcement process. In such an environment, redistributive pressures brought about by an increase in inequality are only implementable in highly mobile societies. On the contrary, when mobility is low, higher inequality reduces tax rates and redistribution. I empirically test this prediction using data on absolute upward mobility for the 50 US states and the District of Columbia, and measuring redistribution as state and local government expenditure per capita. I find a strong, positive and highly significant relation between inequality and redistribution for states with relatively high levels of social mobility: A one Gini-point increase in inequality is associated to roughly $800 higher expenditure per capita. This effect dissipates in states with low levels of mobility. Finally, I embed the politico-economic environment of the paper in a simple endogenous growth model, in order to analyze how inequality directly and indirectly affects the growth process when social mobility and tax evasion are taken into account.