Inequality and the composition of taxes
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This paper analyses the political economics of the composition of taxes. Taxes may be levied on income, or on expenditure, with the median voter pivotal in the theoretical framework analysed. As in Meltzer and Richard (J Polit Econ 89:914–927, 1981), income taxes increase with inequality. Conversely, expenditure taxes first increase and then decrease with increasing inequality. The extent to which taxes are levied on income relative to expenditure unambiguously rises with inequality. In contrast to government size evidence, cross-country data exhibit a robust positive correlation between the extent to which taxes are levied on income relative to expenditure and inequality. Consistent with the theory, this relationship holds most significantly in stronger democracies.
KeywordsTax structure Inequality
JEL ClassificationD78 E62 H20
We are deeply indebted to three anonymous reviewers for detailed comments on earlier drafts and seminar participants at the University of Fribourg and the University of York.
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