Stanford University Department of Economics Political Economy Analysis of Income Distribution

To the extent of my knowledge, this paper is the first attempt to subject relative income under political economy analysis. The paper will introduce a utility function that includes relative income which will drives our models. According to the model, income distribution will coincide with wage distribution under specific assumptions. An intervention in income distribution may help agents to consume leisure but may effect the performance of the economy. When voters are facing the voting choice between equal and unequal policy, there are several parameters that may affect the voting outcome. For every unequal policy, there is an equal policy that is prefered by majority of voters and welfare improving and vice versa for every equal policy. However, not all policy that pass the vote is welfare improving and not all welfare improving policy will pass the vote. Then, we analyze the effect of income tax. Tax decreases the gap between the riches and the poorest, resulting in higher relative standing for almost all agents. The tax scheme we analyze will make all voters who receive redistribution and some net tax payers better off. Income tax that keeps economic efficiency and decreases income gap is welfare-improving.