Relative effective taxation and income inequality: Evidence from OECD countries

Abstract

Using a panel data set of effective tax rates that are directly comparable across Organization for Economic Co-operation and Development (OECD) countries and over time, we investigate the redistributive effect of labour, consumption and capital tax rates. We show that what matters from a redistributive standpoint is the tax mix rather than the tax rates in isolation from the rest. The results suggest that increasing the tax burden on labour or consumption relative to capital leads to higher income inequality. In contrast, greater reliance on labour taxes relative to consumption taxes improves income equality. This effect likely stems from the redistributive objectives of social security contributions incorporated in labour taxes.

Tax structure for consumption and income inequality: an empirical assessment

“…In order to reduce the trade-off between the efficiency-equity goals, the authors highlight the need for a higher tax progressivity and stimulate higher efficiency in tax administrations, among others. Iosifidi and Mylonidis (2017) assess the effects of capital, labour income and consumption taxes for redistribution purposes. The authors find that increases in labour income and consumption taxes prevent the reduction in inequality.…”

Social Policy Perspectives on Economic Inequality in Wealthy Countries

“…More pointedly, Iyer and Reckers () find that the decrease in income inequality associated with taxes on salaries and wages in the United States is negated by the structure of taxes on net capital gains. Relatedly, Iosifidi and Mylonidis (), in a comparative examination of tax policy of OECD countries, find that the relative tax burden (on labor, capital, and consumption) has more impact on inequality than single tax rates on any of those categories in isolation. Specifically, a higher ratio of labor to capital taxes or consumption to capital taxes is associated with more economic inequality, while inequality decreases when the ratio of labor to consumption taxes increases (Iosifidi & Mylonidis, ).…”

“…Relatedly, Iosifidi and Mylonidis (), in a comparative examination of tax policy of OECD countries, find that the relative tax burden (on labor, capital, and consumption) has more impact on inequality than single tax rates on any of those categories in isolation. Specifically, a higher ratio of labor to capital taxes or consumption to capital taxes is associated with more economic inequality, while inequality decreases when the ratio of labor to consumption taxes increases (Iosifidi & Mylonidis, ). Finally, Hatch and Rigby () take a broader perspective on U.S. social policy, examining the relationship between four redistributive policy approaches and economic inequality in U.S. states.…”

Examining the relationship between income inequality, taxation and economic freedom: a panel cointegration approach

“…On the relationship between income inequality and taxation, most of the empirical studies concentrate on the impact of the tax structure or tax progressiveness on income inequality as measured by different inequality indices. There is a broad consensus among empirical researchers that taxation has a negative effect on income inequality (Clark and Lawson, 2008;Nantob, 2016;Drucker et al, 2017;Iosifidi and Mylonidis, 2017;OECD, 2017;Martinez-Vazquez et al, 2012;Martorano, 2018). Different econometric methods are used to capture the effect of taxes on income inequality (OLS, FE, 2SLS, IV, GMM).…”