Taxes and income inequality in the European Union: A quantile regression approach

Abstract

This paper tests the role of taxes in reducing income inequality in the European Union members. Using Eurostat data on Gini coefficients in a 14-year period, a slight growing trend of income inequality is found. The main findings indicate that taxes have a negative and statistically significant impact on income inequality, though this impact is relatively weak. A quantile regression estimates suggest that the redistributive power of taxes is highest in the most unequal societies and vice versa. It implies that taxes reduce income inequality mostly in the early stages of government efforts toward reducing income inequality. In the paper it is argued that combating cross-border tax avoidance is of the first-order importance for reducing income inequality instead of increasing statutory tax rates or progressivity of taxes. Research results are robust to changes of sampling period and lagging independent variables.