Unequal inequalities: Do progressive taxes reduce income inequality?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu This paper analyzes the effect of changes in structural progressivity of national income tax systems on observed and actual income inequality. Using several unique measures of progressivity over the 1981-2005 period for a large panel of countries, we find that progressivity reduces inequality in observed income, but has a significantly smaller impact on actual inequality, approximated by consumption-based GINIs. We show empirically that the differential effect on observed vs. actual inequality is much larger in countries with weaker legal institutions. Substantial differences in inequality response to changes in top vs. bottom rates are also uncovered. The paper discusses implications of these results for flat tax policies. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S JEL Classification:H2, I3, J3, O1, O2

Progressive Tax and Inequality in a Unionized Economy*

“…Result 1(c) spells out that higher labor income tax progressivity could result in higher, instead of lower, income inequality. This is consistent with the empirical finding of Duncan and Sabirianova Peter (). They find that tax progressivity changes for the lower‐income groups, in which agents have higher wage income shares, are actually not effective at reducing inequality in both income and consumption, given that wage incomes are more easily verified due to withholding taxes and that the higher‐income groups are able to more effectively respond to a more progressive tax schedule by reducing their working hours.…”

“…However, in a cross‐country comparison, the OECD () finds that more progressive taxation does not necessarily result in a more equal income distribution. For a large panel of countries, Duncan and Sabirianova Peter () also show that tax progressivity is not effective at reducing income inequality: relative to the poor, the rich are able to more effectively respond to a more progressive tax schedule by reducing their working hours or concealing their hard‐to‐verify income (e.g., capital income). To compare the effect of the tax share versus income share over the past four decades, Hartman () and Bastagli et al .…”

Taxation and Inequality in Developing Countries: Lessons from the Recent Experience of Latin America

“…Recently, taxation is back at the centre of the policy and research agenda (Duncan & Sabirianova Peter, ). Indeed, while both developed and developing countries dramatically reduced tax rates, inequality has sharply increased during the last decades, generating outrage across the world.…”

“…First, it contributes to the interesting and rich literature reporting evidence on the impact of taxation on inequality. Although the majority of works focuses on advanced economies (Atkinson & Leigh, ) or uses a large number of countries for a long period of time (Martínez‐Vázquez, Vulovic, & Moreno‐Dodson, ; Duncan & Sabirianova Peter, ), only few studies have tried to investigate the contribution of taxation to the recent decline of inequality in Latin America. While most of the existing works related to this region tend to be country‐specific incidence studies that rely on micro‐simulation exercises (such as the contributions related to the Commitment to Equity project ), in my knowledge, there are only two papers close to the present work: Cornia et al .…”

Taxation and inequality in the Americas: Changing the fiscal contract?

“…Some consider that measures based on relative changes in consumption would provide a better indication of actual welfare. Duncan and Peter (2012) in a recent interesting analysis suggest that, if properly measured, reduced tax progressivity in countries with high levels of evasion may actually improve welfare as measured by the consumption Gini even if such changes may appear to increase the Gini for observed income. This approach, which reduces the apparent equity costs of more efficient taxes, lends some support to the case for dual income taxes in developing countries made in Bird and Zolt (2011).…”