What specific tax policies on high incomes have reduced inequality in other countries?
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Executive summary
Progressive income taxation combined with redistributive transfers and broad tax bases has demonstrably reduced post‑tax inequality in many advanced countries: OECD and Our World in Data show tax‑and‑transfer systems cutting income gaps by more than ~30% in Europe, North America and Oceania [1] [2]. Cross‑country studies and simulations find that adding progressive brackets or reversing flat taxes can lower Gini coefficients by measurable amounts (examples: EUROMOD simulations showing Gini falls of ~1.2–2.5 percentage points) [3].
1. What “specific” tax policies work — a short inventory
Countries that reduce inequality tend to use several targeted tax levers in combination: progressive personal income tax rates that rise with income; removal of preferential tax treatment for top incomes (broadening bases and taxing capital gains/dividends more like labor income); and larger overall tax revenues that fund transfers and public services. The WID and OECD‑style analyses find that transfers amplify the effect of tax progressivity, and that transfers are often more redistributive than taxes alone [4] [2].
2. Evidence from cross‑national data: how much redistribution occurs
International datasets show wide variation in redistributive impact. Our World in Data and OECD-derived measures quantify reduction in inequality “before and after tax and benefits” and document that some high‑income countries cut Gini substantially through taxes and transfers [2] [5]. A synthesis cited by Climate & Capitalism reports tax‑and‑transfer systems in Europe, North America and Oceania typically cut income gaps by more than 30% [1].
3. Case studies and policy reversals: lessons from reforms
Simulations and empirical work show concrete effects when countries move from flat to progressive systems or adjust top rates. EUROMOD simulations for several Central and Eastern European countries found that introducing progressive elements could reduce the Gini by between about 1.21 and 2.51 percentage points and lower poverty risks comparably [3]. Conversely, real‑world switches to flat taxes (e.g., Moldova, Albania) did not always produce the expected rise in inequality because other factors (economic shocks, implementation, transfers) mattered — illustrating that tax design interacts with broader policy and context [6].
4. Limits and necessary complements: why top rates alone aren’t enough
Multiple sources warn that a highly progressive statutory schedule is insufficient on its own. Redistribution depends on tax capacity, enforcement, the overall size of government revenues, and the structure of transfers and public services. World Bank and WID analyses note that a progressive system must be enforceable and sufficiently large to matter; declines in top statutory rates have weakened “progressive capacity” in some places [7] [4]. The U.S. example: a relatively progressive PIT did not translate into large redistribution because taxes and transfers were smaller than in peer countries [8].
5. Administrative and political constraints that shape outcomes
Practical obstacles limit what tax policy can achieve. Low administrative capacity, weak rule of law, tax avoidance by the wealthy, and political capture reduce the redistributive impact of progressive rates — especially in lower‑income or crisis‑hit countries [6] [7]. The literature emphasizes that without transparent base‑broadening and enforcement, the very rich can skirt higher statutory rates [9].
6. What the evidence recommends to policymakers
Empirical and modelling studies converge on a pragmatic package: introduce or strengthen progressive PIT brackets, broaden bases by closing exemptions and aligning treatment of capital and labor, increase revenue to fund transfers, and invest in enforcement and information to tax high incomes effectively [3] [9]. Analyses repeatedly stress pairing tax reforms with well‑designed cash transfers and public services to translate revenue into lower post‑tax inequality [1] [4].
7. Competing interpretations and remaining uncertainties
Scholars agree that taxes and transfers reduce inequality but disagree on magnitudes and tradeoffs. Some work highlights strong redistributive potential in advanced systems [2], while others show limited impact where pre‑tax inequality and predistribution dominate cross‑country differences [4]. Available sources do not mention long‑term dynamic effects on growth or labour supply in a consistent way across every jurisdiction; debates remain about behavioural responses and optimal design [10].
Limitations: this summary relies on the provided studies and datasets; available sources do not mention every national example or the latest country‑level legislative details beyond those cited here (p1_s1–[11]5).