Can the middle class benefit from more conservative redistribution?

Abstract

There is considerable evidence indicating that high-income earners are increasingly able to avoid or evade taxes, while the working poor at the bottom have a growing justification for demanding greater redistribution. We examine how enhanced external opportunities for top talent and rising redistributive motives from the bottom impact the benefits available to the middle class. The government maximizes a weighted social welfare function, with an exogenous welfare weight assigned to the lowest skill type. This objective is subject to the conventional government budget constraint, truth-telling constraints, and the participation constraint for the highest skill type (“top talent”). We conduct a comparative static analysis of the optimal income allocations in relation to the welfare weight of the lowest incomes and the reservation utility of top talent. We find that, all else being equal, the optimal income received by the middle class decreases as the welfare weight parameter increases, while it rises with the reservation utility of top talent.