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Does inequality constrain the power to tax? Evidence from the OECD

Md. Rabiul Islam, Jakob Madsen () and Chris Doucouliagos ()

European Journal of Political Economy, 2018, vol. 52, issue C, 1-17

Abstract: We investigate the consequences of income inequality on the income tax-to-GDP ratio for 21 OECD countries over a long time period spanning 1870 to 2011. We use several identification strategies, including using unionization as a new IV for inequality. In contrast to predictions from median voter models, we find that rising inequality significantly depresses the income tax ratio. This finding is robust to alternative measures of inequality, treatment for endogeneity, and model specification. The tax ratio increases with the degree of democracy. Inequality also reduces the indirect tax ratio, alters the tax structure, and moderates government spending as a share of GDP.

Keywords: Tax ratio; inequality; Fiscal policy; OECD (search for similar items in EconPapers)
JEL-codes: H2 E25 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Does Inequality Constrain the Power to Tax? Evidence from the OECD (2016) Downloads
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