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The composition effects of tax-based consolidation on income inequality

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  • Ciminelli, Gabriele
  • Ernst, Ekkehard
  • Merola, Rossana
  • Giuliodori, Massimo

Abstract

Many advanced economies have recently embarked on fiscal austerity. As this has come at a time of high and rising income disparities, policy-makers have fretted about the inequality effects of fiscal consolidations. We shed new light on this issue by empirically investigating the (composition) effects of tax-based consolidations on income inequality, output and labour market conditions for a sample of 16 OECD countries over the period 1978–2012. We find that tax-based consolidations reduce income inequality, but at the cost of weaker economic activity. However, tax composition does matter. Indirect taxes reduce income inequality by more than direct taxes, possibly due to the operation of a positive labour supply channel. Higher indirect taxes increase the price of the consumption basket and create incentives for agents to increase their labour supply. We find this effect to be stronger for middle-aged women. Looking at specific instruments, general consumption taxes and personal taxes are the most suited to reduce inequality while at the same time minimizing the equity-efficiency trade-off.

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  • Ciminelli, Gabriele & Ernst, Ekkehard & Merola, Rossana & Giuliodori, Massimo, 2019. "The composition effects of tax-based consolidation on income inequality," European Journal of Political Economy, Elsevier, vol. 57(C), pages 107-124.
    • Handle: RePEc:eee:poleco:v:57:y:2019:i:c:p:107-124
    DOI: 10.1016/j.ejpoleco.2018.08.009
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    3. European Commission, 2018. "Tax Policies in the European Union: 2018 Survey," Taxation Survey 2018, Directorate General Taxation and Customs Union, European Commission.
    4. van der Wielen, Wouter, 2020. "The macroeconomic effects of tax changes: Evidence using real-time data for the European Union," Economic Modelling, Elsevier, vol. 90(C), pages 302-321.
    5. Tingyun Chen & Jean-Jacques Hallaert & Alexander Pitt & Haonan Qu & Maximilien Queyranne & Alaina Rhee & Anna Shabunina & Jérôme Vandenbussche & Irene Yackovlev, 2018. "Inequality and Poverty across Generations in the European Union," IMF Staff Discussion Notes 18/01, International Monetary Fund.
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    7. Kodjovi M. Eklou & Mamour Fall, 2020. "The (Subjective) Well-Being Cost of Fiscal Policy Shocks," IMF Working Papers 2020/005, International Monetary Fund.
    8. Martin Ambassa Messy & Itchoko Motande Mondjeli Mwa Ndjokou, 2021. "Taxation and Income Inequality in Sub-Saharan Africa," Economics Bulletin, AccessEcon, vol. 41(3), pages 1153-1164.
    9. Gervasio SEMEDO & Bertrand LAPORTE & Asbath ALASSANI, 2022. "How does tax structure affect income inequality? Empirical evidence from Sub-Saharan Africa," LEO Working Papers / DR LEO 2960, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    10. Behrouz Sadeghi Amroabadi & Seyed Amin Mansouri & Mohammad Ali Ahmadi, 2024. "Investigating The Factors Affecting The Income Distribution On The Afghan Economy With Emphasis On Taxes," Journal of Academic Research in Economics, Spiru Haret University, Faculty of Accounting and Financial Management Constanta, vol. 16(2 (July)), pages 312-332.
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    12. Vanesa Jorda & Jose M. Alonso, 2020. "What works to mitigate and reduce relative (and absolute) inequality?: A systematic review," WIDER Working Paper Series wp-2020-152, World Institute for Development Economic Research (UNU-WIDER).

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    More about this item

    Keywords

    Income distribution; Tax-based consolidation; Fiscal consolidation; Labour force participation; Tax composition;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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