The Consequences of Inequality: Beliefs and Redistributive Preferences
Max Lobeck, Morten Nyborg Støstad
Conditionally accepted, American Economic Review
Full paper (Alternate link)

Abstract: Using two large-scale studies in the United States we document widespread public agreement that inequality leads to negative societal consequences, for example by increasing crime (74%), harming democratic institutions (57%), and weakening economic growth (52%). An information experiment establishes causal evidence that such inequality externality beliefs substantially influence redistributive preferences. Inequality externality beliefs are less polarized across income levels and political affiliations than fairness views, and have a particularly strong influence on high-income individuals. Our results demonstrate that these previously undocumented beliefs constitute a potentially important determinant of redistributive preferences.

Equity or Externalities: The Redistributive Debates in Norway and the United States
Morten Nyborg Støstad ⓡ Max Lobeck ⓡ Chloé de Meulenaer
Full paper

Abstract: We use natural language processing to classify all redistributive speeches in the U.S. Congress and Norwegian parliament from 2015 to 2022. The Norwegian redistributive debate is markedly more pro-redistribution than the U.S. debate. While American legislators invoke fairness to argue for redistribution and efficiency to argue against it, the Norwegian debate does not align with the traditional equity-efficiency divide. Norwegian legislators often argue that inequality itself has socially inefficient consequences, such as lower trust, more crime, or weaker productivity (inequality externalities). In both settings, externality-based arguments are more likely to appeal to logic and consensus, while fairness arguments express more anger and compassion. In a U.S. survey experiment, fairness arguments induce more outrage but are not more convincing on average. Our results document two distinct ways to argue for redistribution, and suggest that the classic equity-efficiency dichotomy could be less universal than often assumed.

Inequality as an Externality: Consequences for Tax Design  
Morten Nyborg Støstad, Frank Cowell (Journal of Public Economics #105139, open access)
Non-technical summary, Slides (UC Berkeley Public Finance seminar)

Abstract: Economic inequality may affect a wide range of societal outcomes, for example crime rates, economic growth, and political polarization. In this paper we discuss how to model such effects in welfarist frameworks. Our main suggestion is to treat economic inequality itself as an externality, which has wide-ranging implications for classical economic theory. We show this through the Mirrlees (1971) optimal non-linear income taxation model, where we focus on a post-tax income inequality externality. Optimal top marginal tax rates are particularly affected by the externality, implying a novel equality dimension to optimal top tax rate design. We propose that inequality's externality properties may have larger optimal top tax rate implications than standard revenue concerns; our model thus provides a theoretical basis for real-world governmental tax choices that seem irrational under standard optimal taxation models. We also show that the total inequality aversion implied by the current U.S. tax system is insufficient to accommodate both social welfare weights that are decreasing in income and a significant concern for inequality's externality effects.