Taxes and inequality. Does higher progressivity of income taxation lead to less inequality?
The paper explores theoretical and empirical evidence on whether progressivity of personal income taxation lead to less income inequality. The paper demonstrates that there is a lot of theoretical evidence, which question the simplistic notion that more progressivity lead to less inequality and vice versa. Paper provides comprehensive review of the spectrum of possible causal links between progressivity and inequality. Then the paper develops an empirical indicator to measure progressivity of personal income tax. It is used to estimate empirical relations between progressivity and income inequality in 27 European Union countries for the period of 2007-2013. The paper finds a weak relationship between a country being a flat-tax country and smaller reduction of income inequality measured by at-risk-of-poverty rate (but not with GINI inequality). However a statistical test finds no meaningful relationship between progressivity and reduction of at-risk-of-poverty income inequality. The paper concludes that it is impossible to find clear and unambiguous relationship between progressivity of income tax and income inequality. It suggests expanding the scope of research and including analysis of effects of transfer systems.