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The fiscal origins of comparative inequality levels: an empirical and historical investigation

Irarrázaval, Andrés (2020) The fiscal origins of comparative inequality levels: an empirical and historical investigation. Economic History Working Papers (314). London School of Economics and Political Science, London, UK.

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Abstract

This research exploits novel evidence on current and historical inequality dynamics, as well as an instrumental variable (IV) strategy (founded on historical settler mortality à la Acemoglu et al.), to document the fundamental role of income redistribution through taxes and transfers in accounting for differences in inequality across regions and historical periods. This research challenges the conventional wisdom about the origins of world-leading inequality levels in Latin America, India or Africa, arguing that inequality is not rooted in the colonial period nor are current inequality levels explained by supposedly persistent “extractive” economic institutions maintaining an unequal playing field. De facto, Latin America, Africa and India have had, in most cases, lower inequality levels than Western countries (i.e. Western Europe and its Offshoots) until the early 20th century. Before this period, no different than in colonized nations, Western countries had a regressive fiscal system which required the poorest taxpayers to fund public services that benefited richer households. The IV strategy, and the evidence on inequality dynamics, both indicate that contemporary inequality differences are a product of the 20th century. The emergence of redistributive policies due to democratization, which have taken place in the past century, have led to an exceptional inequality reduction in Western countries. Despite that Latin America and India have converged towards “inclusive” economic institutions, high inequality has persisted through a regressive fiscal equilibrium which still is largely in place due to a slower democratization process.

Item Type: Monograph (Working Paper)
Official URL: https://www.lse.ac.uk/Economic-History/Working-Pap...
Additional Information: © 2020 The Author
Divisions: Economic History
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, and Operations
D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions
D - Microeconomics > D6 - Welfare Economics > D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior
F - International Economics > F5 - International Relations and International Political Economy > F54 - Colonialism; Imperialism; Postcolonialism
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
N - Economic History > N3 - Labor and Consumers, Demography, Education, Health, Income, and Wealth > N30 - Economic History: Labor and Consumers, Demography, Education, Health, Income and Wealth: General, International, or Comparative (Migration)
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources; Human Development; Income Distribution; Migration
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements: Legal, Social, Economic, and Political
P - Economic Systems > P1 - Capitalist Systems > P16 - Political Economy
Date Deposited: 23 Nov 2020 14:48
Last Modified: 28 Jan 2021 01:41
URI: http://eprints.lse.ac.uk/id/eprint/107491

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