Abstract
Over the last three decades income inequality has increased in most European countries. In this paper we investigate the role of direct taxes in inequality reduction, with a focus on the EU-15 and the evolution over the period 1998-2008. Progressivity of taxes is one of the major determinants of the equalizing capacity of taxes. In most of these countries the top tariffs have been reduced, as well as the number of tax bands. Hence, it is commonly thought that the progressivity of these taxes has been reduced. However, the effects on overall progressivity (and inequality reduction) are less obvious than they may appear at first sight. First, the tax calculation also includes exemptions, allowances deductions and credits, which may enhance or reduce progressivity. Moreover, changes in the underlying income distribution (due to sociodemographic and labour market changes) and fiscal drag may also play a role.
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