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Inequality and the composition of taxes

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JournalInternational tax and public finance
DateAccepted/In press - 5 Aug 2017
DateE-pub ahead of print (current) - 24 Aug 2017
Number of pages28
Early online date24/08/17
Original languageEnglish

Abstract

This paper analyzes the political economics of the composition of taxes. Taxes may be levied on income, or on expenditure, with the median voter pivotal in the theoretical framework analyzed. As in Meltzer and Richard (1981) income taxes increase with inequality. Conversely expenditure taxes first increase and then decrease with increasing inequality. The extent to which taxes are levied on income relative to expenditure unambiguously rises with inequality. In contrast to government size evidence, cross-country data exhibit a robust positive correlation between the extent to which taxes are levied on income relative to expenditure, and inequality. Consistent with the theory this relationship holds most significantly in stronger democracies.

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© Springer Science+Business Media, LLC 2017. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details

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