INCOME INEQUALITIES AND FISCAL POLICIES. EVIDENCE FROM EU MEMBER STATES.
In general, income or wealth inequalities, along with other types of inequalities or forms of discrimination, are rejected by a large part of societies and individuals, being treated as shortcomings of the economic systems that should be addressed through public policies. Nowadays, the objective of a fair distribution of wealth and income within society became a largely accepted goal, globally assumed. Thus, the 10th objective of the United Nations' Sustainable Development Agenda (Reduce inequality within and among countries) is aiming to ensure that 'no one is left behind', considering that inequality within and among countries is a persistent cause for concern and noticing that in the context of the pandemic crisis between-country inequality rose by 1.2% between 2017 and 2021 (the first such increase in a generation), while before the pandemic inequality was expected to have fallen by 2.6% over the same period (United Nations, 2015). In our view, it is crucial to identify and understand the triggers of income and wealth inequalities, in order to address this issue through effective public policies. On the same note, the European Commission affirms that 'causes and consequences of inequalities can be complex and deeply rooted in social, economic, political and environmental systems and resources', requesting a multifold approach through public policy (European Commission, 2022).
The extent of the inequality degree of wealth redistribution or of individuals' income has been initially quantified in the year 1912 by the Italian sociologist and statistician, Corrado Gini. From a graphical point of view, Gini's coefficient or indicator is represented by a Lorenz curve which considers the share of income received by individuals in respect to the number of citizens who benefit from them, starting from the poorest to the richest. More specifically, the Gini coefficient is measured as the area between the Lorenz curve and an imaginary line of absolute equality, expressed as percentage of the maximum area under the line, quantified by values from 0 (perfect equality) to 100 (perfect inequality). Considering the Gini coefficient as the dependent variable, we performed an empirical analysis intended to quantify the social impact of fiscal policies on income redistribution throughout the EU Member States, using three main categories of independent variables (fiscal, social and economic factors). Our results suggest that income inequalities should be addressed also using other components of public policy (e.g., better education, enhancing the rule of law, improving the legislative framework), beside fostering pro-poor fiscal policies or developing more balanced and transparent tax systems.
The structure of the paper comprises the following sections: review of the previous studies which considered the Gini coefficient altogether with fiscal policies, while the main body of the paper describes the data we used, research methodology, results, conclusions and policy recommendations.
At the beginning of the 20th century, namely the year of 1912, the Italian sociologist and statistician, Corrado Gini, developed an indicator to quantify the degree of income inequality (Yitzhaki and Schechtman, 2013). The reference literature is focused on testing the effects of both taxation and social factors on the personal income of individuals. Thus, in the last twenty years, the problem of income inequality and social segregation has proven to be one of the biggest shortcomings of the modern economic systems, being visible in many of the developing countries. For this reason, an outstanding example is observed in Macedonia (Kozuharov, Pektovski and Ristovska, 2015), a country facing a serious problem in reducing income inequalities, which recorded an average annual growth of about 4% of the coefficient. The authors' empirical approach considers the Gini coefficient as the dependent variable, in South-Eastern Europe and the Balkan Peninsula area, over a period of ten years (2003-2014). Moreover, the authors believe that indirect taxes increase social segregation because people, regardless of their income, are similarly affected by the burden of indirect taxes; also, personal income taxes exert the strongest impact on income inequality.
On the same note, Haughton and Khandker (2009) have published a handbook that includes a series of elaborate studies on poverty and income inequality at world level as well as a series of recommendations addressed to researchers who wish to approach these topics in future empirical analyses. More specifically, the authors aim to determine who bears the tax burden and who benefits more from government spending. The authors note that the progressivity of taxes could be represented by using Lorenz curves and quantified with the Kakwani indicator (Kakwani, 1977a; Kakwani, 1977b; Pellegrino and Vernizzi, 2017) or with the Reynolds-Smolensky indicator measuring redistributive capacity (Avram et al., 2014; Lambert, 2001; Mantovani, 2018). Also, other studies demonstrate that income inequality can negatively influence economic growth as it deprives the poorest of keeping themselves healthy (Galor and Moav, 2004).
Other outstanding research conducted by Karabulut (2020) demonstrates that personal income and profit taxes are much more effective in the process of income redistribution. Karabulut is of the opinion that indirect taxes such as value added taxes and special consumption taxes are applied in such a way that they negatively affect income redistribution because they are regressive. In this regard, the author tests the effects of indirect taxes on the redistribution of income in Turkey between 1990 and 2017. The author's econometric model is structured on the basis of two variables such as: the Gini coefficient (Kozuharov, Pektovski and Ristovska, 2015) as dependent variable while the explanatory variable comprises the total of indirect taxes as share of the gross domestic product. Karabulut is of the opinion that indirect taxes exert a high fiscal burden on the poorest, the results being consistent with the reference literature (Albayrak, 2011; Demirgil, 2018; Drucker, Krill and Geva, 2017; Vintila, Gherghina and Chiricu, 2021; Martinez-Vazquez et al., 2012; Oboh and Eromonsele, 2018; Prasad, 2008). Within the same Turkish economical context, Albayrak (2011) and Bilgic (2015) analyze the effects of fiscal policies on income redistribution considering indirect taxes as fundamental variables and the Gini coefficient as the dependent variable.
In the same context, Prasad (2008) states that income inequality is seen as a combination of taxes, services and social transfers. The author looks in retrospective at the evolution of income inequality and how it was affected by changes in national tax systems and government expenditures in Latin America and OECD Member Countries. The results demonstrate that direct taxes led to a decrease in the Gini coefficient, while indirect taxes led to its increase. Also, Karakotsios et al. (2020) examine the link between income inequality, taxation and economic freedom using an empirical analysis of causality between variables for 58 countries, for the period between 1995 to 2016. Furthermore, the regression equation underlying the study of Karakotsios et al. (2020) includes, in addition to the Gini coefficient as dependent variable, the following explanatory variables: total tax revenues as share of GDP and the indicator of economic freedom (tax burden). The results show that there is a long-term causal link between taxation, economic freedom and income inequality.
Drucker, Krill and Geva (2017) test the impact of taxes on income redistribution by using a panel data analysis for 25 OECD Member Countries and setting as reference period 1975 to 2011. Through their analysis, the authors demonstrate that consumption taxes increase income inequality and have a positive impact on economic growth. On the same note, Oboh and Eronmonsele (2018) establish that indirect taxes led to increased income inequality in Nigeria between 1980 and 2014.
Additionally, Martinez-Vazquez et al. (2012) approach a panel data model with the aim of highlighting the effects that fiscal policies and government spending exert on the distribution of income in 150 countries, related to the period 1970-2009. According to the authors, the taxes applied to personal income have positive effects, while general consumption taxes and custom duties have negative effects on income redistribution. Also, Martinez-Vazquez et al. (2012) note that personal income taxes are usually assumed to be progressive, social contributions (as they depend on individuals' salaries) are regressive, while taxes on corporate income are progressive given they are usually paid by equity holders. As for indirect taxes, considering they are supported by the final consumers, they are regressive.
The interest in the analysis of the impact that taxation exerts on income redistribution was priory approached by Meltzer and Richard (1981), who brought forward the hypothesis that when average income increases at the same time with the income computed as the relative mean values of income redistribution, then more of the individuals with low income will tend to bear the burden of the higher direct or indirect taxes.
In the same context, Ray (2019) analyzes the possible correlation between the level of economic inequality within a country and the percentage of resident households that cannot afford adequate home heating, considering the latter factor as a dependent variable in his empirical study for all EU Member States between 2009 and 2017. Thus, the author specifies that in the last three to four decades, a wide increase in economic inequality has been observed even in countries with high standards of living (Atkinson, 2005; Atkinson and Pikkety, 2007; Vintila, Gherghina and Chiricu, 2021; Dorling, 2018...
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