REGRESSIONS ON PROGRESSION: THE HIDDEN COST OF INEQUALITY REDUCTION

Abstract

This study examines the effectiveness of changing tax progressivity on decreasing income inequality, and whether this change has a measurable impact on real per capita GDP growth and unemployment rates. Using sample sets of 58 countries over the period of 1981 to 2005, I find a significant negative relationship between progressivity and the dependent variables. On average, a one-point increase in progressivity is associated with a 6.09-point fall in Gini, and a 1.48% and 2.35% fall in real per capita growth and unemployment rates respectively. Unlike previous studies which use more general measurements and definitions of Gini, this paper uses a more refined measurement of Gini for each estimation. An instrumental variables (IV) approach is used to account for endogeneity, where the average progressivity of contiguous neighbours is used as the instrument for a country’s progressivity.