Inequality and bipolarization-reducing mixed taxation

Abstract

Progressive income and commodity tax structures have been examined independently in terms of their ability to reduce income inequality and bipolarization. Rather than focusing on income and commodity taxes in isolation, this paper studies mixed tax systems, which subject both income and consumption to taxation. It provides necessary and sufficient conditions on the structure of these systems that ensure a reduction in income inequality and bipolarization for both exogenous and endogenous income scenarios. Commodity taxation is “superfluous” in the case of exogenous income, as any post-tax income distribution achievable through a mixed tax system can be replicated by income taxation alone. In contrast, when income is endogenous, there are cases where relying solely on income taxation is ineffective, while mixed tax structures have equalizing and depolarizing potential.