Inequality, Redistribution & Political Nationalism: A Theoretical Model and Empirical Analysis

Abstract

Nationalism and income inequality are two of the most pressing economic and political issues of the time. This paper establishes how these two variables are interconnected. A theoretical model combines a two-dimensional policy space with social identification to explain the optimal nationalism and tax responses for left and right political parties, respectively. The data shows that left and right parties both use nationalism when the population of people below the average wage (the poor) increases. Further evidence shows that nationalism today affects future redistribution. In countries with a high poor population, a one percentage point increase in left nationalism will reduce redistribution in four years time by 0.8-1.6%. In countries with a low poor population, right nationalism will increase redistribution in four years time by 0.8-2.9%. Some reasons are hypothesised for these surprising results.