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

Md. Islam (), Jakob Madsen and Chris Doucouliagos

No 29-16, Monash Economics Working Papers from Monash University, Department of Economics

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.

Keywords: Tax ratio; inequality; fiscal policy; OECD (search for similar items in EconPapers)
JEL-codes: E25 H2 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-11
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
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Citations: View citations in EconPapers (3)

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Journal Article: Does inequality constrain the power to tax? Evidence from the OECD (2018)
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