Tax Progressivity and Income Inequality

49 Pages Posted: 3 Sep 2008  

Denvil Duncan

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; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Date Written: June 2008

Abstract

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.

Keywords: income inequality, Gini, personal income tax, structural progressivity, tax evasion, redistribution, Kuznets hypothesis, democracy, law and order

JEL Classification: H2, I3, J3, O1, O2

Suggested Citation

Duncan, Denvil and Sabirianova Peter, Klara, Tax Progressivity and Income Inequality (June 2008). Andrew Young School of Policy Studies Research Paper Series No. 08-26. Available at SSRN: https://ssrn.com/abstract=1260860 or http://dx.doi.org/10.2139/ssrn.1260860

Denvil Duncan

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Klara Sabirianova Peter (Contact Author)

University of North Carolina - Chapel Hill ( email )

Chapel Hill, NC 27599
United States

HOME PAGE: http://www.unc.edu/~kpeter

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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