The Benefits of Progressive Taxation in Economic Development

Abstract

Progressive income taxation may result in a more equitable income distribution, higher revenues, less financial and economic volatility, and faster growth. The evidence shows a link with higher revenues and a more equitable income distribution but also with larger deficits. There is no link to output volatility and growth. The alternative of a value-added tax does not offer universally better outcomes, either in isolation or in combination with progressive taxes.JEL classification: F36, 011, 023

Direct versus Indirect Taxation: Trends, Theory, and Economic Significance

“…In addition, they find that there has been relatively little net change in the role of the tax system as an automatic stabilizer; the US tax system effectiveness in stabilizing aggregate demand in 1995 was roughly the same as in the early 1960s, but lower than at its estimated peak in 1981. In a more recent study, Weller (2007), using cross-country data for 1981 to 2002, finds the relationship between progressive taxes and growth volatility to be ambiguous.…”

“…Li and Sarte (2004) find that the progressivity change associated with the TRA-86 in the United States had a significant effect on income inequality, resulting in a 20 to 24 per cent increase in the Gini coefficient of income. More recently, Weller (2007) uses cross-country data from 1981 to 2002 and finds positive effects of progressive taxation on income distribution. An important handicap, explaining the few studies avail able, is the difficulty of putting together compatible panel data on income distribution.…”

The Impact of Tax and Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries

“…Weller (2007) uses cross-country data from 1981 to 2002 and finds positive effects of progressive taxation on income distribution. More recently, Duncan and Sabirianova Peter (2008) use a sophisticated measure of progressivity 8 to examine whether inequality in the distribution of income is affected by their measure of structural progressivity of national income tax systems.…”

Coping with Rising Inequality in Asia: How Effective Are Fiscal Policies?

“…For example, Weller (2007) uses crosscountry data from 1981 to 2002 and ªnds positive effects of progressive taxation on income distribution. Gwartney and Lawson (2006) use panel data on changes in marginal tax rates from 1980 to 2002 to examine their impact on the distribution of income and ªnd that countries with the most signiªcantly high tax brackets rate reductions have experienced the largest increases in inequality over the sample period.…”