Political redistribution: The role of delegated lobbying and wage bargaining

Traditional political economy models of taxation fail to explain why there is so little redistribution of wealth despite significant wealth inequalites. This is for two reasons: (1) The median voter approach cannot deal with a multidimensional policy-space and (2) wealth taxation affects well-organized and homogenous interest groups so that lobbying affects policy outcomes. In this paper the interaction of factor price bargaining and delegated tax-lobbying is studied. Two agents engage in lobbying: managers of large firms and trade union leaders. Low wealth taxation is the natural consequence of income maxmimization on the side of interest group leaders if (1) managers are in a position to appropriate part of the firms' revenues for themselves and (2) union members cannot monitor the lobbying activities of union leaders.