Income Redistribution Around the Globe: Determinants and Mechanisms

Income redistribution through taxes and transfers varies significantly across countries and over time. Existing explanations for this heterogeneity range from pre-fiscal inequality (e.g., the median voter theorem) to factors like democracy, development level, ethnic fractionalization, and unemployment. This study re-examines the determinants of income redistribution. We measure redistribution as the change in the pre- and post-fiscal Gini coefficient using a novel dataset comprising 100 data points from 77 primarily low- and middle income countries. Our analysis covers more fiscal interventions than found in the literature: in addition to direct taxes and transfers, it includes indirect taxes and subsidies. It also addresses econometric issues prevalent in the literature, such as post-treatment bias. The change in the Gini coefficient is further decomposed into three channels: progressivity, size, and reranking—an analysis not previously undertaken comprehensively. Our findings indicate that a stronger rule of law, higher ethnic fractionalization, a larger share of old-age population, greater female parliamentary representation, higher unemployment, a higher income ratio between middle and top deciles and having a federal system are associated with greater income redistribution. Conversely, democracy and larger population size are associated with lower levels of redistribution. We find that the size and progressivity of direct transfers and indirect taxes are the primary mechanisms driving these relationships.