Inequality, Bipolarization, and Tax Progressivity

The steady rise in income and wealth inequality in the last four decades, together with the evolution of a vanishing middle class, has raised concerns about potentially pernicious effects of these trends on social stability and economic growth. This paper evaluates the possibility of designing tax systems aimed at reducing income inequality and bipolarization. Using two fundamentally different metrics, we provide a unified foundation of tax progressivity whereby, roughly, taxes are progressive if and only if they are inequality reducing; and taxes are inequality reducing if and only if they are bipolarization reducing. (JEL D31, H22, H24)

Causes and Consequences of Income Inequality – An Overview

Rising income inequality is one of the greatest challenges facing advanced economies today. Income inequality is multifaceted and is not the inevitable outcome of irresistible structural forces such as globalisation or technological development. Instead, this review shows that inequality has largely been driven by a multitude of political choices. The embrace of neoliberalism since the 1980s has provided the key catalyst for political and policy changes in the realms of union regulation, executive pay, the welfare state and tax progressivity, which have been the key drivers of inequality. These preventable causes have led to demonstrable harmful outcomes that are not explicable solely by material deprivation. This review also shows that inequality has been linked on the economic front with reduced growth, investment and innovation, and on the social front with reduced health and social mobility, and greater violent crime.

Wage Discrimination and Tax Progressivity

How does wage discrimination affect tax progressivity? To address this, optimal tax progressivity is characterized in an economy where individuals have different levels of ability and some of the individuals face wage discrimination. A decrease in wage discrimination reduces optimal tax progressivity, while an increase in ability inequality raises it. When pre-tax income inequality increases, tax progressivity can decrease. Moreover, interaction effect on tax progressivity of wage discrimination and ability inequality is negative. These findings hold whether social planners or voters decide tax progressivity. The empirical analysis with panel data of Organisation for Economic Co-operation and Development economies provides evidence supportive of the theoretical findings.

Income tax progressivity and inflation during the world wars

This paper studies the impact of inflation on income taxes in Sweden, the UK, and the United States during the world wars. As tax reforms were rising top marginal rates and reducing exemption thresholds, extraordinary levels of inflation eroded the real value of exemptions, brackets, and deductions. The micro-simulation of actual and alternative scenarios shows that inflation made the tax less progressive, particularly in Sweden during World War I and the UK during World War II. Nevertheless, its redistributive effect increased due to the related growth in tax revenue. Inflation contributed to transform a “class tax’’ into a “mass tax”.

Inequality Dynamics in Malta: Cracks, Blips and Long-Term Trends

This study analyses changes in income inequality in Malta and its driving factors between 2005 and 2018. The study employs and analyses data collected by Malta’s National Statistics Office, which conforms with the European Union Survey on Income and Living Conditions. Education and labour status are identified as key drivers behind income inequality changes over the period under review. While the Gini coefficient remained relatively stable between 2005 and 2018, the Lorenz curve moved further away from the line of equality at the upper end of the income distribution, showing modest increases. Over the 2014-2018 period, Government intervention has been mildly neutralizing through social transfers but not through taxes. Social transfers provided a greater safety net to citizens than they did during the 2005-2009 period, whereas tax reforms have abraded some tax progressivity. We also find that inequality was mostly attributed to differences in the individual’s qualifications, hours worked, occupations, and household employment structure and size, highlighting an important role for policy to further reduce the barriers to economic inclusion.

The Effects of Solidarity, Income, and Reliance on the State on Personal Income Tax Preferences. The Case of the Czech Republic

The current increase in government spending, caused by COVID epidemics and the increasing visibility of leftist political groups in public media, emphasizes the short-term need for sustainable income taxation. In the long run, rising inequality worldwide makes taxation of high-incomes indispensable for sustainable economic development. This paper empirically studies public attitudes on taxation related to income, preferences for solidarity vs. individual performance, and reliance on the state in the Czech Republic. In this Eastern European country, the dichotomies above bear even more importance due to the communist past. We apply the hierarchical regression analysis with smoothing spline transformations to a representative sample of public opinion data (N = 1104, aged 15–95 years, M ± SD: 47.74 ± 17.39; 51.2% women, 18.50% with higher education). The results suggest that income was associated with the perception that taxes for the rich are inadequately high but was unrelated to perceptions of tax adequacy for average and poor groups of respondents. Higher solidarity and reliance on the state were associated with the desire to increase taxation of high-incomes and decrease taxation of poor income groups. Surprisingly, the reliance on the state was associated with a desire to decrease taxation of average-incomes and total taxation while increasing tax progressivity. Preferences for solidarity were associated with higher preferred overall taxation and more tax progressivity. The explanatory powers of preferences for solidarity and reliance on the state in explaining the variation in tax preferences are at least equivalent and, in some cases, twice as large as the explanatory power of the age, gender, education, and income altogether. The results above present new mechanisms that can contribute to sustainable endogenous economic development.

Being mindful in the tax context in Italy: Examining whether and how mindfulness relates with tax evasion intentions and support for tax progressivity

Two studies explored whether and how mindfulness relates with citizens’ tax evasion intentions and support for progressive tax rates. Based on theoretical and empirical grounds, in Study 1 (N = 1,175) we proposed that mindfulness would be negatively related with tax evasion intentions through decreased social dominance orientation. Drawing on Duckitt’s dual-process motivational model, in Study 2 (N = 722) we proposed that mindfulness would be positively related with support for progressive taxation through the mediation of lower competitive-jungle beliefs, and then lower social dominance orientation. Instead, we did not expect to find mediation of the link between mindfulness and support for progressive taxation through dangerous-world beliefs and right-wing authoritarianism. These studies inform about the motivational pathways through which mindfulness relates with tax evasion intentions and support for progressive taxation.

Redistributive Effects of Health Care Out-of-Pocket Payments in Cameroon

Background: The bulk of health care financing in Cameroon is derived from out-of-pocket payments. Given that poverty is pervasive with a third of the population living below the poverty line, health care financing from out-of-pocket payments is likely to have redistributive and equity effects. Out-of-pocket payments on health care limit the ability of households to afford non-healthcare goods and services.Method: The study uses data from the 2014 Cameroon Household Survey to estimate the Kwakwani index for analyzing tax progressivity and the model developed by Aronson, Johnson, and Lambert (1994) to measure the redistributive effect of out-of-pocket payments for health care. The estimated indexes measure the extent of the progressivity of health care payments and the reranking that results from the payments.Results: The results indicate that out-of-pocket payments for health care in Cameroon in 2014 represented a significant share of household prepayment income. The estimates also show that the redistributive effect is positive implying that health care payments are weakly progressive and will weakly enhance equity and post-payment reranking is low. Conclusion: The study concludes that out-of-pocket payments on health care in Cameroon are progressive (income redistributive effect = 0.00144). A positive redistributive effect suggests that out-of-pocket payments on health care exert an equalizing effect on the distribution of post-payment incomes. However, the existence of some horizontal inequity and re-ranking implying that people in the same income band are treated unequally depending on the burden of ill-health.

Taxing the Rich: Public Preferences and Public Understanding

Who supports high taxes on the rich? Existing accounts of public attitudes focus on egalitarian values and material interests, but make little mention of the ideas people hold about how the economy works descriptively. Drawing on the distinction between positive- and zero-sum beliefs about the economy, and original survey data from five countries, I show that there are systematic differences in tax progressivity preferences across groups within the public who think differently about the economy. Positive-sum thinking is associated with less progressive preferences. However, despite theoretical attention, there is no evidence of systematic zero-sum thinking among the public. On the other hand, some descriptions focus on conflict between rich and poor, and these do predict support for greater progressivity. Further analysis is required to differentiate alternative causal explanations of the patterns observed, but different modes of descriptive economic thinking are an important feature of the mass politics of progressivity.