Inequality and Personal Income Taxation

Abstract

Why does personal income taxation (PIT) remain relatively low in many developing countries despite a period of democratic advancement and rapid economic growth? This stylized fact is hard to reconcile with standard political economy models of taxation that expect democratic regimes to bring about redistribution in countries that suffer from high inequality. This article argues that the details of political institutions are key to understand why PIT remains low in many developing and unequal countries. In particular, we show how legislative malapportionment may prevent the use of personal income taxes as a major revenue source by skewing the distribution of political power across groups. Malapportionment is usually not exogenous but the result of design by those with political power at the transition or reform moment. As such, it depends on the structure of political and economic power in society. Based on a sample of more than 50 countries between 1990 and 2007, this article finds that (a) countries with historically more unequal distributions of wealth and income tend to systematically present higher levels of legislative malapportionment and (b) higher levels of malapportionment are associated with lower shares of personal income taxes in GDP.