Tax Progressivity and Income Inequality
Indiana University Bloomington - School of Public & Environmental Affairs (SPEA); Institute for the Study of Labor (IZA)
Klara Sabirianova Peter
University of North Carolina - Chapel Hill; Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)
Andrew Young School of Policy Studies Research Paper Series No. 08-26
This paper examines whether income inequality is affected by the structural progressivity of national income tax systems. Using detailed personal income tax schedules for a large panel of countries, we develop and estimate comprehensive, time-varying measures of structural progressivity of national income tax systems over the 1981-2005 period. We find that while progressivity reduces observed inequality in reported gross and net income, it has a significantly smaller impact on true inequality, approximated by consumption-based measures of Gini. We show theoretically and empirically that, under specific conditions, tax progressivity may increase actual inequality, especially in countries with weak law and order and a large informal nontaxable sector. The paper discusses implications of these results for increasingly popular flat tax policies. The Kuznets hypothesis is also supported by the estimates.
Number of Pages in PDF File: 49
Keywords: income inequality, Gini, personal income tax, structural progressivity, tax evasion, redistribution, Kuznets hypothesis, democracy, law and order
JEL Classification: H2, I3, J3, O1, O2working papers series
Date posted: September 3, 2008
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