Inequality and the composition of taxes

This paper analyzes the political economics of the composition of taxes. Taxes may be levied on income, or on expenditure, with the median voter pivotal in the theoretical framework analyzed. As in Meltzer and Richard (1981) income taxes increase with inequality. Conversely expenditure taxes first increase and then decrease with increasing inequality. The extent to which taxes are levied on income relative to expenditure unambiguously rises with inequality. In contrast to government size evidence, cross-country data exhibit a robust positive correlation between the extent to which taxes are levied on income relative to expenditure, and inequality. Consistent with the theory this relationship holds most significantly in stronger democracies.