Inequality, Bipolarization, and Tax Progressivity

• Authors: Humberto Llavador.
• BSE Working Paper: 112191 | February 19
• Keywords: Income inequality , Progressive Taxation , incentive effects of taxation , shrinking middle class , income bipolarization
• JEL codes: D63, D71
• Income inequality
• Progressive Taxation
• incentive effects of taxation
• shrinking middle class
• income bipolarization

The steady rise in income and wealth inequality in the last four decades, together with the evolution of a vanishing middle class, has raised concerns about potentially pernicious effects of these trends on social stability and economic growth. This paper evaluates the possibility of designing tax systems aimed at reducing income inequality and bipolarization. Using two fundamentally different metrics, the relative Lorenz preorder popularized by Atkinson (1970) to measure inequality, and the relative bipolarization preorder put forth in Chakravarty (2009, 2015) to measure bipolarization, we provide a unified foundation of tax progressivity whereby, roughly, taxes are progressive if and only if they are inequality reducing if and only if they are bipolarization reducing. The details of this characterization vary depending on whether or not labor supply is responsive to taxation.