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Does Inequality Constrain the Power to Tax? Evidence from the OECD

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  • Md. Rabiul Islam
  • Jakob Brochner Madsen
  • Hristos Doucouliagos

Abstract

We investigate the consequences of income inequality on the income tax-to-GDP ratio for 21 OECD countries over a long time period spanning 1870 to 2011. We use several identification strategies, including using unionization as a new IV for inequality. In contrast to predictions from median voter models, we find that rising inequality significantly depresses the income tax ratio. This finding is robust to alternative measures of inequality, treatment for endogeneity, and model specification. The tax ratio increases with the degree of democracy and openness and decreases with urbanization. Inequality also reduces the indirect tax ratio and alters the tax structure.

Suggested Citation

  • Md. Rabiul Islam & Jakob Brochner Madsen & Hristos Doucouliagos, 2016. "Does Inequality Constrain the Power to Tax? Evidence from the OECD," Monash Economics Working Papers 29-16, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2016-29
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    Keywords

    Tax ratio; inequality; fiscal policy; OECD;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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