Demography and Inequality: The Effect of Tax Composition

Abstract

This paper investigates how aging societies lead to worsen distribution of income through tax composition measured by ratio of direct taxes to indirect taxes. The rationale follows: due to the political power of working age population emanating from majority of their share in the population, in a median voter model, they manage to shift the tax burden on aged population in an aging society through increasing direct taxes more than indirect taxes. This results in elevating income inequality in society. To estimate our hypothesis, we apply panel data using time and country fixed effects. Based on sample covering 110 countries from 1990-2020 and applying different inequality measures and robustness check, the empirical evidence considerably supports this hypothesis. The results hold firmly across the OECD and non-OECD countries together with strong and weak democracies.