Resumen de Inequality, the politics of redistribution and the tax-mix

Jenny Carolina de Freitas Fernandes

• Previous research on the political economy of redistribution finds that taxes and redistribution are positively correlated with income inequality. However there is not clear evidence that unequal societies redistribute more. When redistribution is financed through income taxes the existence of an informal sector that evades income taxes reduces the tax-base of the income tax instrument. Inequality may increase the size of the informal sector workforce. Accounting for the tax-base effect of inequality we find a non-linear relationship between inequality and redistribution. We show that the tax-base effect along with the political channel determines the structure of the tax- mix, composed by income and consumption taxes. Moreover we give a rationale for the fact that more unequal societies rely more heavily on indirect taxes.