Relative effective taxation and income inequality: Evidence from OECD countries

Abstract

Using a panel data set of effective tax rates that are directly comparable across Organization for Economic Co-operation and Development (OECD) countries and over time, we investigate the redistributive effect of labour, consumption and capital tax rates. We show that what matters from a redistributive standpoint is the tax mix rather than the tax rates in isolation from the rest. The results suggest that increasing the tax burden on labour or consumption relative to capital leads to higher income inequality. In contrast, greater reliance on labour taxes relative to consumption taxes improves income equality. This effect likely stems from the redistributive objectives of social security contributions incorporated in labour taxes.