Recently, income inequality has become a widely discussed topic. Increasingly more people, politicians and scholars believe that inequality is a negative development per se. As a result, various measures aimed at combatting inequality are proposed, most of them concentrating on redistribution.

Progressive taxation is one of the most popular measure to reduce income inequality. On the contrary, the flat tax regime is criticised for its alleged failure to reduce income inequality.

Arguments that progressive income taxation will reduce inequality were commonly used to justify the introduction of a progressive personal income tax (PIT) rate effective in Lithuania as of January 2019 (although it was introduced together with the cap on social security contributions).

Does a progressive income tax reduce inequality more that a proportional one? Sadly, the question is rarely asked. On rare occasions when it is asked, the answers are laden with rhetoric rather than evidence.

This research explores to what extent progressive income tax is a decisive factor in reducing income inequality.

The paper uses two approaches. First, it investigates whether progressive personal income tax (PIT) reduces income inequality more than the flat rate PIT? Then it explores whether a more progressive PIT reduces income inequality more than a less progressive PIT?

The answers to these questions are significant in both theoretical and practical terms. If there appears to be no clear relationship between higher progressivity and larger reduction of inequality, then one may ask whether the calls for higher taxation on higher income can be justified on the grounds of reducing inequality.

Download the full paper Progressive Taxes and Inequality.