Inherent Inequality and the Extent of Redistribution in OECD Countries

Abstract

The purpose of this paper is to examine the relationship between the inherent inequality and the extent of redistribution by utilising the Luxembourg Income Study (LIS) database. This database provides both market and disposable income distributions for a number of OECD countries. Our finding that redistribution in OECD countries is positively associated with inherent inequality is not the new one. The point we have made in this paper is that this finding can be explained through the Mirrlees optimal income tax model. If the inherent inequality increases (decreases) for any given incentive effects and the degree of espoused egalitarianism so will the society\'s redistributive effort.