Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries
Eric M. Zolt
University of California, Los Angeles (UCLA) - School of Law
Richard M. Bird
University of Toronto - Joseph L. Rotman School of Management; Georgia State University - Andrew Young School of Public Policy
UCLA Law Review, Vol. 52, 2005
UCLA School of Law, Law-Econ Research Paper No. 05-22
Inequality has increased in recent years in both developed and developing countries. Tax experts, like others, have focused on how taxes may reduce the inequality of income and wealth. In developed countries, the income tax, especially the personal income tax, has long been viewed as the primary instrument for redistributing income. This Article examines whether it make sense for developing countries to rely on personal income taxes to redistribute income. We think not, for three reasons. First, the personal income tax has done little, if anything, to reduce inequality in many developing countries. Second, it is not costless to pretend to have a progressive personal income tax system. Third, opportunity costs also exist from relying on taxes for redistributive purposes. If countries want to use the fiscal system to reduce poverty or reduce inequality, they need to look elsewhere.
This Article begins with some initial reflections on the redistributive role of the tax system. It then considers the relative success of developed and developing countries in using tax systems to redistribute income. Finally, This Article examines some alternatives in reforming the personal income tax, as well as options available to developing countries in designing and implementing more progressive fiscal systems.
Number of Pages in PDF File: 72
Keywords: redistribution, inequaltiy, personal income tax, developing countries, tax reform
JEL Classification: H24
Date posted: September 20, 2005