International Tax and Public Finance

, Volume 23, Issue 4, pp 762–783 | Cite as

Unequal inequalities: Do progressive taxes reduce income inequality?

  • Denvil DuncanEmail author
  • Klara Sabirianova Peter
Policy Watch


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.


Income inequality Gini Personal income tax Structural progressivity Tax evasion 

JEL Classification

H2 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.

Supplementary material

10797_2016_9412_MOESM1_ESM.pdf (468 kb)
Supplementary material 1 (pdf 468 KB)


  1. Adam, A., Kammas, P., & Lapatinas, A. (2014). Income inequality and the tax structure: Evidence from developed and developing countries. Journal of Comparative Economics, 43(1), 138–154.Google Scholar
  2. Allingham, M., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3–4), 323–338.CrossRefGoogle Scholar
  3. Atkinson, A. B., & Brandolini, A. (2001). Promise and pitfalls in the use of ‘secondary’ data-sets: Income inequality in oecd countries as a case study. Journal of Economic Literature, 39(3), 771–799.CrossRefGoogle Scholar
  4. Beck, T., Demirg-Kunt, A., & Levine, R. (2000). A new database on financial development and structure. World Bank Economic Review, 14(3), 597–605.CrossRefGoogle Scholar
  5. Besley, T., & Case, A. (1995). Incumbent behavior: Vote-seeking, tax-setting, and yardstick competition. The American Economic Review, 85(1), 25–45.Google Scholar
  6. Borge, L.-E., & Rattso, J. (2004). Income distribution and tax structure: Empirical test of the Meltzer–Richard hypothesis. European Economic Review, 48(4), 805–826.CrossRefGoogle Scholar
  7. Bulr, A. (2001). Income inequality: Does inflation matter? IMF Staff Papers, 48(1), 139–159.Google Scholar
  8. Chong, A., & Gradstein, M. (2007). Inequality and institutions. The Review of Economics and Statistics, 89(3), 454–465.CrossRefGoogle Scholar
  9. Clarke, G. R. G., Xu, L. C., & Zou, H.-F. (2006). Finance and income inequality: What do the data tell us? Southern Economic Journal, 72(3), 578–596.CrossRefGoogle Scholar
  10. Clotfelter, C. T. (1983). Tax evasion and tax rates: An analysis of individual returns. The Review of Economics and Statistics, 65(3), 363–373.CrossRefGoogle Scholar
  11. Deaton, A. (1997). The analysis of household surveys: A microeconometric approach to development policy. Baltimore, MD: Johns Hopkins University Press.CrossRefGoogle Scholar
  12. Dhami, S., & Al-Nowaihi, A. (2007). Why do people pay taxes? Prospect theory versus expected utility theory. Journal of Economic Behavior and Organization, 64(1), 171–192.CrossRefGoogle Scholar
  13. Dobson, S., & Ramlogan-Dobson, C. (2012). Why is corruption less harmful to income inequality in Latin America? World Development, 40(8), 1534–1545.CrossRefGoogle Scholar
  14. Doerrenberg, P., & Duncan, D. (2013). Distributional implications of tax evasion: Evidence from the lab. Public Finance Review, 42(6), 720–744.Google Scholar
  15. Duncan, D. (2014). Behavioral responses and the distributional effects of the russian ‘flat’ tax. Journal of Policy Modeling, 36(2), 226–240.CrossRefGoogle Scholar
  16. Easterly, W. (2007). Inequality does cause underdevelopment: Insights from a new instrument. Journal of Development Economics, 84(2), 755–776.CrossRefGoogle Scholar
  17. Egger, P., & Radulescu, D. M. (2009). The influence of labour taxes on the migration of skilled workers. The World Economy, 32(9), 1365–1379.CrossRefGoogle Scholar
  18. Engstrom, P., & Holmlund, B. (2009). Tax evasion and self-employment in a high-tax country: Evidence from Sweden. Applied Economics, 41(19), 2419–2430.CrossRefGoogle Scholar
  19. Feldstein, M. (1995). The effect of marginal tax rates on taxable income: A panel study of the 1986 tax reform act. Journal of Political Economy, 103(3), 551–572.CrossRefGoogle Scholar
  20. Ferede, E., & Dahlby, B. (2012). The impact of tax cuts on economic growth: evidence from the Canadian provinces. National Tax Journal, 65(3), 563–594.CrossRefGoogle Scholar
  21. Goni, E., Lopez, J. H., & Serven, L. (2011). Fiscal redistribution and income inequality in Latin America. World Development, 39(9), 1558–1569.CrossRefGoogle Scholar
  22. Gordon, R., & Li, W. (2007). Puzzling tax structures in devloping countries: A comparison of two alternative explanations, chapter 1 (Vol. 16). Chicago, IL: The University of Chicago Press.Google Scholar
  23. Gordon, R., & Li, W. (2009). Tax structures in developing countries: Many puzzles and a possible explanation. Journal of Public Economics, 93(7–8), 855–866.CrossRefGoogle Scholar
  24. Gorodnichenko, Y., Martinez-Vazquez, J., & Sabirianova Peter, K. (2009). Myth and reality of flat tax reform: Micro estimates of tax evasion response and welfare effects in russia. Journal of Political Economy, 117(3), 504–554.CrossRefGoogle Scholar
  25. Gorodnichenko, Y., Sabirianova-Peter, K., & Stolyarov, D. (2009). Inequality and volatility moderation in russia: Evidence from micro-level panel data on consumption and income. Review of Economic Dynamics, 13(1), 209–237.CrossRefGoogle Scholar
  26. Gradstein, M., & Milanovic, B. (2004). Does libert = egalit? A survey of the empirical links between democracy and inequality with some evidence on the transition economies. Journal of Economic Surveys, 18(4), 515–537.CrossRefGoogle Scholar
  27. Gravelle, J. G. (1992). Equity effects of the tax reform act of 1986. Journal of Economic Perspectives, 6(1), 27–44.CrossRefGoogle Scholar
  28. Imbens, G. W., & Angrist, J. D. (1994). Identification and estimation of local average treatment effects. Econometrica, 62(2), 467–475.CrossRefGoogle Scholar
  29. Kakwani, N. C. (1977). Measurement of tax progressivity: An international comparison. Economic Journal, 87(345), 71–80.CrossRefGoogle Scholar
  30. Kim, D.-H., & Lin, S.-C. (2011). Nonlinearity in the financial development-income inequality nexus. Journal of Comparative Economics, 39(3), 310–325.CrossRefGoogle Scholar
  31. Kleibergen, F., & Paap, R. (2006). Generalized reduced rank tests using the singular value decomposition. Journal of Econometrics, 133(1), 97–126.CrossRefGoogle Scholar
  32. Kleven, H., Landais, C., & Saez, E. (2013). Taxation and international migration of superstars: Evidence from the European football market. American Economic Review, 103(5), 1892–1924.Google Scholar
  33. Kopczuk, W. (2005). Tax bases, tax rates and the elasticity of reported income. Journal of Public Economics, 89(11–12), 2093–2119.CrossRefGoogle Scholar
  34. Lakner, C., & Milanovic, B. (2015). Global income distribution: From the fall of the berlin wall to the great recession. The World Bank Economic Review (forthcoming).Google Scholar
  35. Law, S. H., & Tan, H. B. (2009). The role of financial development on income inequality in malaysia. Journal of Economic Development, 34(2), 153–168.Google Scholar
  36. Lee, Y., & Gordon, R. H. (2005). Tax structure and economic growth. Journal of Public Economics, 89(5–6), 1027–1043.CrossRefGoogle Scholar
  37. Lemieux, T., Fortin, B., & Frechette, P. (1994). The effect of taxes on labor supply in the underground economy. American Economic Review, 84(1), 231–254.Google Scholar
  38. Martinez-Vazquez, J. (2008). The impact of budgets on the poor: Tax and expenditure benefit incidence analysis, chapter 5 (pp. 113–162). Washington, DC: World Bank.Google Scholar
  39. Meltzer, A. H., & Richard, S. F. (1981). A rational theory of the size of government. Journal of Political Economy, 89(5), 914–27.CrossRefGoogle Scholar
  40. Milanovic, B. (1999). Explaining the increase in inequality during transition. Economics of Transition, 7(2), 299–341.CrossRefGoogle Scholar
  41. Minarik, J. J. (1979). The size distribution of income during inflation. Review of Income and Wealth, 25(4), 377–392.CrossRefGoogle Scholar
  42. Mookerjee, R., & Kalipioni, P. (2010). Availability of financial services and income inequality: The evidence from many countries. Emerging Markets Review, 11(4), 404–408.CrossRefGoogle Scholar
  43. Musgrave, R., & Thin, T. (1948). Income tax progression, 1929–48. Journal of Political Economy, 56(6), 498–514.CrossRefGoogle Scholar
  44. OECD. (2011). International migration outlook: SOPEMI 2011. Paris: OECD Publishing.CrossRefGoogle Scholar
  45. Persson, T., & Tabellini, G. (2002). Political Economics and Public Finance (Vol. 3). Amsterdam: Elsevier.Google Scholar
  46. Sabirianova Peter, K., Buttrick, S., & Duncan, D. (2010). Global reform of personal income taxation, 1981–2005: Evidence from 189 countries. National Tax Journal, 63(3), 447–478.CrossRefGoogle Scholar
  47. Slemrod, J. (1985). An empirical test for tax evasion. The Review of Economics and Statistics, 67(2), 232–238.CrossRefGoogle Scholar
  48. Slemrod, J. (1994). On the high-income Laffer curve, chapter 6 (pp. 177–210). Cambridge: Cambridge University Press.Google Scholar
  49. Slemrod, J. (1995). Income creation or income shifting? behavioral responses to the tax reform act of 1986. The American Economic Review, 85(2), 175–180.Google Scholar
  50. Slemrod, J., & Kopczuk, W. (2002). The optimal elasticity of taxable income. Journal of Public Economics, 84(1), 91–112.CrossRefGoogle Scholar
  51. Suits, D. B. (1977). Measurement of tax progressivity. American Economic Review, 67(4), 747–752.Google Scholar
  52. Violante, G. (2010). Special issue: Cross-sectional facts for macroeconomists. Review of Economic Dynamics, 13(1), 1–264.CrossRefGoogle Scholar
  53. Whalley, J. (1990). Foreign responses to U.S. tax reform. Cambridge: MIT Press.Google Scholar
  54. Yitzhaki, S. (1974). Incometax evasion: A theoretical analysis. Journal of Public Economics, 3(2), 201–202.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.School of Public and Environmental AffairsIndiana UniversityBloomingtonUSA
  2. 2.Department of EconomicsUniversity of North Carolina - Chapel HillChapel HillUSA
  3. 3.CEPR, and IZABonnGermany

Personalised recommendations