Abstract

This paper proposes an explanation for why universal suffrage has not implied larger rich-to-poor transfers of wealth. In the presence of borrowing constraints, if current taxation finances (at least partially) policies that redistribute future income, the poor, who are more likely to be liquidity constrained, may form a coalition with the rich and vote for low redistribution. In this context, the effects of an increase in income inequality on the level of redistribution depend on whether the increase in inequality is concentrated among the poor or the middle class. In the former case, an increase in inequality tends to decrease redistribution, whereas, in the latter case, it tends to increase redistribution. Empirical evidence for a panel of OECD countries provides support to our main thoretical implications.