Does democracy reduce income inequality?

This paper presents a theory of the effects of political freedom on income inequality, with redistribution acting as a channel through which freedom affects inequality. It is tested on data for 83 countries using system GMM, the results showing freedom reduces inequality across countries. If the freedom level in a country 5 years ago were 1 % higher than another, its income inequality would be 1.33 % lower than the other. The results reveal a nonlinear inverted U-shaped relationship between freedom and inequality. The total effect evolves slowly over a long period of almost 25 years after democratisation takes place. A robust finding is that freedom reduces inequality only in democracies, not in others. Economic development, culture, and institutions cause inter-country income differences. Primary education lowers inequality, and secondary education has little effect.