Welfare Policies, Relative Income and Majority Choice

Felix FitzRoy and Michael Nolan

Manchester School, 2016, vol. 84, issue 1, 81-94

Abstract: In a model with heterogeneous workers, quasi-linear utility and both intensive and extensive margins of employment, we investigate welfare with optimal linear taxes and wage subsidies under Rawlsian and utilitarian objectives, and the effects of concern for relative income. Relativity implies much higher optimal utilitarian taxes, but makes little difference to already very high optimal Rawlsian taxes. A substantial wage subsidy is generally optimal. We also consider the political economy of pairwise majority voting preferences for differing policies. Rawlsian redistribution is always defeated, though often by only a modest majority, while a constrained utilitarian policy, with equal transfers to unemployed and employed individuals—a universal basic income—wins a majority in all cases, which is robust to changes in the underlying productivity distribution.

Date: 2016
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