The Fiscal Origins of Comparative Inequality levels: An Empirical and Historical Investigation


Economics Department Working Papers
Autores COES:

The literature studying the determinants of inequality and development in the Americas and across former colonies has largely overemphasized colonial legacies and an allegedly “institutionalized” unequal distribution of assets and opportunities to explain record-high inequality levels in Latin America, India, or Africa. 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. The findings challenge the conventional wisdom about the origins of world-leading inequality levels in Latin America, India or Africa, showing 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 that 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. In these regions, low checks and balances on the executive and limited political voice undermined the formation of the credible commitments necessary to raise substantial progressive taxation (notably direct taxes) and the political participation required to mobilize such resources towards redistribution. It seems that there is “no redistribution without representation”.

Como citar: Irarrázaval, Andrés (2021). The fiscal origins of comparative inequality levels: an empirical and historical investigation. Economics Department Working Papers, Vol. 525, pp. 1 – 78. University of Chile, Santiago de Chile.