Progressivity and Development

Our contribution is threefold. First, using micro data from 21 countries including the poorest and the richest in the world---our aim is to reach 72 countries for which data are available---we document (i) a negative relationship between the ability to insure consumption against income shocks and economic development and (ii) a negative relationship between the degree of tax progressivity and the stage of development. Importantly, the computation of tax progressivity includes formal and informal (family) net transfers across households, which is particularly relevant for poor countries. Second, to capture these facts we propose a macroeconomy with idiosyncratic income shocks in which agents accumulate physical and human capital (through learning-by-doing) and face a progressive income tax function that depends on the stage of development. Our goal is tassess whether tax progressivity can go a long way in explaining the larger ability to insure consumption in poor countries than in rich countries. Third, we use this economy to assess the role of tax progressivity in explaining income per capita and welfare differences across countries. Our preliminary results suggest a important role for progressivity in explaining income and welfare differences across countries.