Tax Progressivity and Income Inequality: A case study of a selected number of countries with natural resource rents and OECD countries

Document Type : Scientific paper

Authors

1 Assistant professor, Department of economics, Faculty of Human science, ILam University, Ilam, Iran

2 M.A in economics Ilam university

Abstract

The main purpose of this article is to study the impact of progressive income tax systems on income inequality. In so doing, by using progressive tax data which were developed by Peter and Duncan (2008) three panel data model are estimated for a selected number of countries with natural resource rents and OECD countries. The findings showed that although progressive tax reduced the observed income inequality, it had a smaller impact on the real inequality which was measured by consumption-based Gini coefficient and may even increase the real inequality under specific conditions (e.g.in countries with weak law and order and a large informal nontaxable sector). Also natural resource rents and inflation are the main factors affecting inequality. Based on the result a progressive tax structure and raise the top tax rate will not necessarily reduce inequality, but also in terms of the underground economy and weak institutions, progressive tax systems may even worsen inequality, so to reduce inequality we recommend that government should pay special attention to macroeconomic stabilization and optimal management of oil revenue spending.

Keywords

References

Alam, J. & Wallace, S. (2004). Can Developing Countries Impose an Individual Income Tax? Andrew young School of Policy Studies.
Aron, J. (2000). Growth and Institutions: A Review of the Evidence, The World Bank Research Observer15 (1):99-135.
Bahrami, J; Pahlavani, M. & Jansuz, P. (2013). Impact of Bank Credits on Economic Growth in Selected Developing Countries by Using GMM Method, Journal of Monetary Bank Research, 15: 77-96.
Bali M. Asadollahzadeh (2008). The Impacts of Taxes on Inequality and Income Distribution in Iran, Journal of tax research, 16(1): 73-92.
Bird, R. M. & Zolt, E. M. (2005). Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries, 0508.
Deaton, A. (1997). The Analysis of Household Surveys: A Micro econometric Approach to Development Policy, The John Hopkins University Press, Baltimore.
Duncan, D. & Peter, K. S. (2008). Tax Progressivity and Income Inequality, Journal of the Andrew Young School of Policy Studies.
Engstrom, Per. & Holmlund, B. (2009). Tax Evasion and Self-employment in a High-tax Country: Evidence from Sweden, Applied Economics, 41(19): 2419{2430.
 Falahi, M; Mahdavi A, M & Jandaghi M, F. (2014). Natural Resource Rents and Corruption in OPEC Countries: A Panel Data Approach, Iranian Energy Economics, 11: 195-227.                                                                                                                                      
Freire-seren, M, J. & Panades, J. (2008). Does Tax Evasion Modify the Redistributive Effect of Tax Progressivity? Social Science Research Network, 84, No267, PP: 486-495.
Gale, W. G; Kearney, M. S. & Orszag, P. (2015). Would a Significant Increase in the Top Income Tax Rate Substantially Alter Income Inequality? Journal of Economic Studies at Boookings.
Gilak. H. A, M. (2001). Comparative Analysis of Distributive Effect of Income Tax in Islam and Income Tax System in Iran, Journal of Economic Research (Tahghighat-e-Eghtesadi), 57: 189-228.
Gorodnichenko, Y; Martinez-Vazquez, J. & Sabirianova Peter, K. (2008). Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia, NBER Working Paper Series, No. 13719.
Harris, J, R. & Todaro, M, P. (1970). Migration, Unemployment, and Development: A Two-Sector Analysis, 60 AM, Econ, Rev, 126.
Husted, T. A. & Kenny, L. W. (1997). The Effect of the Expansion of the Voting Franchise on the Size of Government, The Journal of Political Economy, 105, No. 1, PP: 54-89.
Kaplow, L. and Shavell, S. (2002). Fairness Versus Welfare: Notes on the Pareto Principle, Preferences, and Distributive Justice, The Journal of Legal Studies, 32(1), Pages: 331-362.
Khanzadi, A; Heidariyan, M. & Moradi, S. (2014). Investigating and Analyzing the Role and Effects of Tax Revenues on Income Distribution and Human Development, Journal of Quantitative Economics, 11: 135-158
Kumar, A. (2008). Labor Supply, Deadweight Loss and Tax Reform Act of 1986: A Nonparametric Evaluation Using Panel Data, Journal of Public Economics 92(1-2): 236-253.
Lemieux, T; Fortin, B. & Frechette, P. (1994). The Effect of Taxes on Labor Supply in the Underground Economy, American Economic Review 84(1): 231-254.
Rezagholizadeh, M. & Aghaei, M. (2016). Investigating the Effect of Direct Tax on the Income Distribution in Iran, Majlis and Rahbord journal,  22 (84), Winter 2016, Page 129-156
Malik, A. (2002). State of the Art in Governance Indicators, UNDP Occasional Papers, no. 2002/7.
Meltzer, A. & Richard, S. (1981). A Rational Theory of the Size of Government, Journal of Political Economy 89(51): 914-927.
Minarik, J. (1979). The Size Distribution of Income during Inflation, Review of Income and Wealth 25(4): 377-392.
Persson, T. & Tabellini, G. (1999). Political Economics and Public Finance, NBER Working Paper, No. 7097.
Peter, K, S; Buttrick, S. & Denvil, D. (2008). Global Reform of Personal Income Taxation, 1981-2005: Evidence from 189 Countries, Andrew Young School of Policy Studies Research Paper Series, No. 08-08, February 2008.
Piketty, T. & Saez, E. (2003). Income Inequality in the United States, 1913-2000, Quarterly Journal of Economics, 118 (1)1-39.
Rice, T. W. (1985). An Examination of the Median Voter Hypothesis, The Western Political Quarterly, 38:211-223.
Sameti, M. & Rafie, L. (2010). Interaction of Income Distribution, Taxes and Economic Growth: The Case of Iran and Some Selected East Asian Countries, Iranian Economic Review, Vol.14, No.25.
Schneider, F. & Enste, D. (2000). Shadow Economies around the World: Size, Causes and Consequences, IMF, Working Paper No.26.
Yitzhaki, S. (1974). A Note on Income Tax Evasion: A Theoretical Analysis, Journal of Public Economics 3(2): 201-202.
Young, k; Davoodi, R. and  Gupta, S. (2000). Income Distribution and Tax and Government Social Spending Policies in Developing Countries, Washington D.C, IMF, Paper No 214.
Zarranezhad, M & Anvari, E. (2005). Reviews of Panel Data Application in Econometrics, Journal of Quantitative Economics, 2(4): 21-52     
Macroeconomics Research Letter
Volume 12, Issue 24
December 2018
Pages 95-119

Files

History

  • Receive Date: 01 January 1970
  • Accept Date: 01 January 1970

Share

How to cite

Statistics