London School of Economics EOPP: Economic Organisation and Public Policy Programme LSE
EOPP: Economic Organisation and Public Policy Programme

Abstract for:

The Effect of Direct Democracy on Income Redistribution: Evidence for Switzerland

Lars P. Feld, Justina A.V.  Fischer, Gebhard  Kirchgässner, October 2006
Paper No' PEPP 23: | Full paper (pdf)
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Keywords: Income Redistribution; Direct Democracy, Referenda, Initiatives.

JEL Classification: D7; D78; I30; H75; H11

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Abstract:

There is an intensive dispute in political economics about the impact of institutions on income redistribution. While the main focus is on comparison between different forms of representative democracy, the influence of direct democracy on redistribution has attracted much less attention. According to theoretical arguments and previous empirical results, government policies of income redistribution are expected to be more in line with median voter preferences in direct than in representative democracies. In this paper, we find that institutions of direct democracy are associated with lower public spending and revenue, particularly lower welfare spending and broad-based income and property (wealth) tax revenue. Moreover, we estimate a model which explains the determinants of redistribution using panel data provided by the Swiss Federal Tax Office from 1981 to 1997 and a cross section of (representative) individual data from 1992. While our results indicate that less public funds are used to redistribute income and actual redistribution is lower, inequality is not reduced to a lesser extent in direct than in representative democracies for a given initial income distribution. This finding might well indicate the presence of efficiency gains in redistribution policies.