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Breaking down inequality: Can taxes be the great equalizer?

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  • Lucas Menescal

Abstract

Given the contrasting evidence on the redistributive role of taxation, this study seeks to isolate the redistribution process performed through the tax and transfers system and address the effects of several taxes on the difference between pre- and post-tax and transfers Gini coefficients, commonly referred as the Reynolds-Smolensky Index (RSI), in a panel of 107 advanced and developing economies for the period between 1990 to 2020. Contrary to previous evidence, obtained results showed little evidence that direct taxation had significant redistributive effects, whereas indirect taxation only presented negative impacts on developed economies. Still, robust redistributive effects of social security contributions were observed for both groups, while property taxes seem to be associated with higher redistribution in the long run. Finally, the importance of investment and employment levels is underlined and policy recommendations for higher income redistribution are proposed.

Suggested Citation

  • Lucas Menescal, 2024. "Breaking down inequality: Can taxes be the great equalizer?," Working Papers REM 2024/0328, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp03282024
    as

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    File URL: https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_0328_2024.pdf
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    References listed on IDEAS

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    1. Matthew Odedokun & Jeffery I. Round, 2001. "Determinants of Income Inequality and its Effects on Economic Growth: Evidence from African Countries," WIDER Working Paper Series DP2001-103, World Institute for Development Economic Research (UNU-WIDER).
    2. Manwar Hossein Malla & Pairote Pathranarakul, 2022. "Fiscal Policy and Income Inequality: The Critical Role of Institutional Capacity," Economies, MDPI, vol. 10(5), pages 1-16, May.
    3. Charles Vellutini & Juan Carlos Benitez, 2021. "Measuring the Redistributive Capacity of Tax Policies," IMF Working Papers 2021/252, International Monetary Fund.
    4. Chen Wang & Koen Caminada & Kees Goudswaard, 2012. "The redistributive effect of social transfer programmes and taxes: A decomposition across countries," International Social Security Review, John Wiley & Sons, vol. 65(3), pages 27-48, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Taxation; Income redistribution; Reynolds-Smolensky Index; Panel Data.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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