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Unequal Inequalities: Do Progressive Taxes Reduce Income Inequality?

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  • Duncan, Denvil

    ()
    (Indiana University)

  • Peter, Klara Sabirianova

    ()
    (University of North Carolina, Chapel Hill)

Abstract

This paper analyzes the effect of changes in 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. We show empirically that the differential effect on observed vs. actual inequality is much larger in countries with weaker legal institutions. Substantial differences in inequality response to changes in top vs. bottom rates are also uncovered. The paper discusses implications of these results for flat tax policies.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6910.

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Length: 67 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6910

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Keywords: income inequality; Gini; personal income tax; structural progressivity; tax evasion;

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References

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  1. Yuriy Gorodnichenko & Jorge Martinez-Vazquez & Klara Sabirianova Peter, 2007. "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0720, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Frank Kleibergen & Richard Paap, 2003. "Generalized Reduced Rank Tests using the Singular Value Decomposition," Tinbergen Institute Discussion Papers 03-003/4, Tinbergen Institute.
  3. Yuriy Gorodnichenko & Klara Sabirianova Peter & Dmitriy Stolyarov, 2010. "Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 209-237, January.
  4. Easterly, William, 2007. "Inequality does cause underdevelopment: Insights from a new instrument," Journal of Development Economics, Elsevier, Elsevier, vol. 84(2), pages 755-776, November.
  5. Dhami, Sanjit & al-Nowaihi, Ali, 2007. "Why do people pay taxes? Prospect theory versus expected utility theory," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 64(1), pages 171-192, September.
  6. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, Elsevier, vol. 84(1), pages 91-112, April.
  7. Moreno-Dodson, Blanca & Wodon, Quentin, 2008. "Public Finance for Poverty Reduction: An Overview," MPRA Paper 11078, University Library of Munich, Germany.
  8. Andrea Brandolini & Anthony B. Atkinson, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(3), pages 771-799, September.
  9. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, Econometric Society, vol. 66(4), pages 827-862, July.
  10. Peter, Klara Sabirianova & Buttrick, Steve & Duncan, Denvil, 2009. "Global Reform of Personal Income Taxation, 1981-2005: Evidence from 189 Countries," IZA Discussion Papers 4228, Institute for the Study of Labor (IZA).
  11. Henrik Kleven & Camille Landais & Emmanuel Saez, 2010. "Taxation and International Migration of Superstars: Evidence from the European Football Market," NBER Working Papers 16545, National Bureau of Economic Research, Inc.
  12. Wojciech Kopczuk, 2004. "Tax bases, tax rates and the elasticity of reported income," Discussion Papers, Columbia University, Department of Economics 0304-15, Columbia University, Department of Economics.
  13. Jonathan S. Feinstein, 1991. "An Econometric Analysis of Income Tax Evasion and its Detection," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 14-35, Spring.
  14. Georg R. G. Clarke & Lixin Colin Xu & Heng-fu Zou, 2006. "Finance and Income Inequality: What Do the Data Tell Us?," Southern Economic Journal, Southern Economic Association, vol. 72(3), pages 578-596, January.
  15. Borge, Lars-Erik & Rattso, J.Jorn, 2004. "Income distribution and tax structure: Empirical test of the Meltzer-Richard hypothesis," European Economic Review, Elsevier, Elsevier, vol. 48(4), pages 805-826, August.
  16. Jane G. Gravelle, 1992. "Equity Effects of the Tax Reform Act of 1986," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(1), pages 27-44, Winter.
  17. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Yongzheng Liu & Jorge Martinez-Vazquez, 2010. "The Growth-Inequality Tradeo in the Design of Tax Structure: Evidence from a Large Panel of Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1320, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Richard M. Bird & Eric M. Zolt, 2013. "Taxation and Inequality in the Americas: Changing the Fiscal Contract?," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1315, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Denvil Duncan & Ed Gerrish, 2014. "Personal income tax mimicry: evidence from international panel data," International Tax and Public Finance, Springer, Springer, vol. 21(1), pages 119-152, February.

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