Voting on Redistribution with Heterogeneous Productivity - An Experimental Test of the Compensatory Theory

In the framework of a simplified Meltzer-Richard model, which rests on proportional taxation providing an equal lump-sum payment for each group member, this study explores the effect of heterogeneous productivity on the individually preferred and collective agreed tax rate. Compensatory theory suggests that redistributive taxation is considered fair, if it compensates for unjustified privileges of the rich. Thus, while fully egoistic subjects do not care about the source of inequality, compensation theory assumes that a subjects’ decision on redistributive taxation will account for the source of an unequal distribution of net-incomes. To explore this argument, we designed a laboratory experiment in which we manipulated subjects’ source of productivity in a real-effort task. The real-effort task requires subjects to count numbers in a reoccurring random list of numbers and letters. Subjects earn a token for each correct answer. The sum of correct tokens is multiplied by a productivity factor (exchange rate) to determine subjects’ net income. We distinguish three treatment conditions; productivity is equal among all group members (reference treatment with equal productivities), productivity is unequal (low, medium, high) and randomly distributed among group members (random unequal productivities), and finally, productivity is unequal (low, medium, high) and distributed among group members according to their performance in a knowledge task (earned unequal productivity). Subjects are matched into groups of three and play the simplified, one-shot Meltzer-Richard game. Contrary to the fully egoistic solution and in line with the compensatory argument, experimental evidence indicates that the individually preferred and collectively agreed tax rate is the highest in the random unequal treatment. Beyond that we find that participants compensate disadvantages that stem from bad luck with higher redistribution but do not redistribute more when wealth is earned by luck rather than effort.