Individualism and tax progressivity

Abstract

This article proposes a novel theoretical model that factors in individualism culture for explaining tax progressivity. It shows that an increase in the level of individualism reduces optimal tax progressivity, regardless of whether a social planner or voters choose income tax schedule. Moreover, an increase in the pre-tax income inequality raises tax progressivity optimal for the social planner or voters, for any given level of individualism. These findings from introducing individualism culture for tax progressivity are quite original. This article makes an important contribution of providing an explanation for the puzzling fact that taxes of some countries with low inequality of pre-tax income are more progressive than those of other with high inequality. This article implies that a country with low pre-tax income inequality can have highly progressive tax if the country’s culture features fairly low level of individualism. Empirical analysis with panel data of 87 countries finds evidence supportive of these theoretical findings.