Income Redistribution & Inequity Aversion: An Empirical Analysis of Individual Welfare & Preferences in the United States

Abstract

Classical Inequity Aversion Theory, first proposed in the late 1900s, suggests that individuals are intrinsically inequity averse - that is, individuals have a natural tendency to dislike inequality. Theoretically, this also suggests that individuals are better off with lower national inequality and hence, that they generally support government intervention to reduce inequality. In our bipartite study, we aim to test the practicality of this theory, specifically in the United States. Part I tests how the level of national inequality and the annual amount of government income redistribution affect individual welfare in the United States. Part II then studies individual preferences in the United States - namely, how numerous demographic and life status variables affect individual advocacy for or aversion to government redistribution of income. Our results indicate that individuals exhibit aversion to both inequality and redistribution of income and further, that the relationship between level of inequality and individual preferences for redistribution may be non-linear. We suggest that this dynamic may instead be modeled by an exponential function - specifically, when inequality is low, individuals are strongly averse to redistribution, when inequality is neither high nor low, individuals are still rather strongly averse (though less so) to it, but when inequality is very high, individuals are strongly in favor of it. Additionally, we evidence that a number of the incorporated demographic and life status control variables are pertinent to the discussion, many of which we suggest are interdependent. Based on the results and subsequent analyses of our study, we propose increased government efforts to reduce national inequality through means other than elevated taxes and transfers in order to satisfy individual preferences for both low inequality and low income redistribution. Additionally, we highlight the problematic possibility that national redistributive policy does not accurately reflect the preferences of its citizens, and discuss the surrounding implications.