On the Political Economy of Redistribution and Public Good Provision

We analyze the public provision of public goods and income redistribution in a median voter framework. We review existing related frameworks, devoting special attention to their implications for applied analysis. Motivated by empirical regularities discovered in the analysis of CEQ data linking the percentage of “net receivers” to the levels of public good provision, we present an extension of the classic framework of taxation and public good provision that departs from the assumption of a simple proportional tax in favor of a flat tax with exemption. Adjusting the exemption level, we capture tax schemes that are restricted to generating different numbers of net receivers. We then let voters decide on the tax rate and the quantity of public good provided. We find that, in a standard framework, the public good level can increase or decrease in the proportion of “net receivers,” according to the relationship that exists between the income of the decisive voter and average income in the population conditional on income being larger than the exemption. This suggests that, to account for the richness of comparative statics we observe, the framework used should encompass additional considerations such as turnout and the presence of substitutes for government provided public goods.