Income inequality and the tax structure: Evidence from developed and developing countries

•This paper examines the effect of income inequality on tax policy.•We examine empirically the relationship for a cross section dataset of 75 countries.•Increased inequality exerts positive impact on capital taxation.•Increased inequality exerts negative impact on labor taxation.•This relationship remains robust across various alternative political regimes.

This paper seeks to examine the effect of income inequality on the structure of tax policies. We first use a simplified theoretical framework which allows us to formalize the testable implications of the relevant literature. Subsequently, our analysis indicates that more unequal economies rely heavier on capital relative to labor income taxation. This relationship remains robust across various alternative measures of income inequality and most importantly through alternative political regimes. In addition, our analysis investigates the role of the tax structure on the relationship between income inequality and economic growth. Our empirical findings provide evidence in favor of a political economy channel through which income inequality affects economic growth.