Unequal inequalities: Do progressive taxes reduce income inequality?
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This paper analyzes the effect of changes in the 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. An empirical comparative analysis shows that the differential effect on observed versus actual inequality is much larger in countries with weaker legal institutions. We also find that structural progressivity has a greater equalizing effect in environments that support pro-poor redistribution. Substantial differences in inequality response to changes in top versus bottom rates are also uncovered.
KeywordsIncome inequality Gini Personal income tax Structural progressivity Tax evasion
JEL ClassificationH2 I3 J3 O1 O2
We would like to thank participants at the 71st Annual Congress of the International Institute of Public Finance, and two anonymous referees for their feedback and suggestions.
Compliance with ethical standards
Conflict of interest
The authors declare that they have no conflict of interest.
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