The Growth-Inequality Tradeo in the Design of Tax Structure: Evidence from a Large Panel of Countries

This paper examines the potential tradeo between economic growth and income inequality in the design of tax structure by using a structural model and a large panel data set of 150 developed and developing countries for the period 1970-2009. Tax structure, which is treated as an endogenous variable in the estimations, is comprehensively proxied by a series of indicators, including major tax categories measured in both levels and rates, an index for overall tax mix, and an index for tax progressivity. While we nd clear evidence of a tradeo between growth and inequality for some key tax instruments (e.g. income taxes), it appears that this tradeo may be avoided in the design of a few other taxes (e.g. excise taxes). Nevertheless, from a policy perspective, due either to the relative small estimated marginal effects or to the actual small changes in the size of tax instruments, the overall growth and distributional impacts of the changes in tax structure over the past decades have not been very large.