Distributive politcs, economic growth, and the Simpsons

Many moons ago, I wrote a paper (with Alberto Alesina) called “Distributive Politics and Economic Growth,” which remains one of my most heavily cited publications.  The paper has a simple idea: in highly unequal societies, the median voter is more likely to demand high taxes on capital, which in turn can be adverse for growth.  So high inequality leads to redistributive politics, which is bad for growth.  We also supplied some cross-country empirical evidence that is consistent with the theory.

This idea has been resuscitated in recent discussions on the consequences of the rise in American inequality. In a speech that has received much attention, for example, Alan Krueger highlighted this line of thought (referring to a paper by Torsten Persson and Guido Tabellini contemporaneous with ours as well as more recent supportive empirical research at the IMF).

So it was particularly timely when Jose Tavares from Universidade Nova de Lisboa in Portugal sent me a report on the paper prepared by two of his students, Luís Fonseca and Miguel Aguiar.  Ingeniously, the students explicate the paper using the Simpsons as a backdrop.  It’s very well done, and worth a look.  Here it is.    

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What would happen if you substituted "contributor" for "voter" in this analysis? The assumption here is that the political system will track the worldview of the median voter; but what if the system is geared to responding to the worldview of the median contributor of money to politicians and their campaigns, would we see some different implications?

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Sorry, but as presented the argument seems clearly flawed -- perhaps fatally. You are, it appears, talking about a wealth, not an income, tax. Such taxes must factor in a long-term better return that inflation that effectively yields approximately 9% per year after inflation for stocks, and 1-3% for bonds. With an index fund to diversify, therefore, an 8 % return on investment after inflation is indicated. To achieve a disincentive for keeping things in capital as opposed to "consumption" (which is not a realistic option for a billionaire), you would have to therefore have a 7-8% tax on total wealth. If you see such a thing out there, let me know. And no, you don't get to argue that capital gains taxes involve taxing things twice -- a careful analysis shows that after careful assessment of just who owns what and net present value effects, the additional tax burden is minor. Finally, because the "capitalist" is concerned with returns to capital, and income/returns to labor are minor to him, it is in his interest to drive the capital rate far below where it should be -- because he is not rational -- or believes that this "capital monopoly" is actually better for him. To put it another way, he will simply seek to offload all taxes on someone else and will accept a monopoly "overshoot" from the government market he controls.

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So folks, what happened with the simpsons??

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