The political economics of redistribution, inequality and tax avoidance

A central result in the political economy of taxation is that the degree of redistribution is positively linked to income inequality. However, empirical evidence supporting such a relationship turns out to be mixed. This paper shows how the different empirical reactions can be rationalized within a simple model of tax avoidance and costly tax enforcement. By focusing on structure-induced equilibrium in which taxpayers vote over the size of the income tax and the level of tax enforcement, we show that more inequality may well reduce the extent of redistribution, depending on two opposing effects: the standard political effect and a negative tax base effect working through increases in the average level of tax avoidance and the share of enforcement expenditures in total tax revenue.