The fiscal origins of comparative inequality levels: an empirical and historical investigation

Andrés Irarrázaval

Economic History Working Papers from London School of Economics and Political Science, Department of Economic History

Abstract: This research exploits novel evidence on current and historical inequality dynamics, as well as an instrumental variable (IV) strategy (founded on historical settler mortality à la Acemoglu et al.), to document the fundamental role of income redistribution through taxes and transfers in accounting for differences in inequality across regions and historical periods. This research challenges the conventional wisdom about the origins of world-leading inequality levels in Latin America, India or Africa, arguing that inequality is not rooted in the colonial period nor are current inequality levels explained by supposedly persistent “extractive” economic institutions maintaining an unequal playing field. De facto, Latin America, Africa and India have had, in most cases, lower inequality levels than Western countries (i.e. Western Europe and its Offshoots) until the early 20th century. Before this period, no different than in colonized nations, Western countries had a regressive fiscal system which required the poorest taxpayers to fund public services that benefited richer households. The IV strategy, and the evidence on inequality dynamics, both indicate that contemporary inequality differences are a product of the 20th century. The emergence of redistributive policies due to democratization, which have taken place in the past century, have led to an exceptional inequality reduction in Western countries. Despite that Latin America and India have converged towards “inclusive” economic institutions, high inequality has persisted through a regressive fiscal equilibrium which still is largely in place due to a slower democratization process.

Keywords: inequality; redistribution; institutions; colonialism; Latin America; India (search for similar items in EconPapers)
JEL-codes: D02 D31 D63 D72 F54 H23 N30 O15 O17 P16 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2020-11
New Economics Papers: this item is included in nep-his
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