Policy specific moods disconnect income inequality and government redistribution

Abstract

ABSTRACT The competing arguments of “unequal democracy” and “dynamic democracy” highlight the puzzle of why there has been unabated economic inequality in the U.S. over the past few decades. This study addresses the question by investigating the causal directions and dynamic relations of inequality, redistributive policy specific moods (social welfare and tax), and government redistribution. Unlike current approaches of emphasizing mass preferences or government responsiveness across income groups, this work puts forward that the sustained increase in inequality is due to a lack of evidence of the “dialogue” between inequality and redistribution. It is the policy specific moods that lead to this disconnection. The Granger causality test based on time series data in the U.S. indicates that inequality causes tax but not social welfare policy moods, whereas redistribution simply responds to the latter. Also, the ECM results show that a long-run relationship presents between inequality and tax policy moods as well as between social welfare policy moods and redistribution. This study suggests that the disconnection is a consequence of the mismatch between the redistributive policy demand and supply. Distinguishing between policy preferences for welfare benefits and taxes improves our ability to explain the self-reinforcing inequality.