The relationship between tax structures and income inequality

The global rise in income inequality has heightened interest in how fiscal policy—particularly the compo-sition of tax revenues—affects income distribution. This study examines the relationship between gov-ernment revenues from direct and indirect taxes and income inequality, contributing to the tax incidence literature through three key innovations: it focuses on a recent period (2000–2012), compares countries with dif-ferent income levels and tax structures, and addresses endogeneity using the System Generalized Method of Moments (System GMM) estimator. The empirical analysis reveals that a greater reliance on indirect taxation is associated with higher income inequality, while a larger share of direct taxes correlates with reduced inequality. These patterns hold across both OECD and non-OECD countries. Given the higher Gini coefficients observed in non-OECD economies, the findings highlight the importance of enhancing tax progressivity as a policy strategy to reduce income disparities and promote more equitable economic development.