Inequality, tax avoidance and redistribution

The present paper seeks to explain the pattern of income redistribution in a world of increased market income inequality. In some countries, larger market income inequality has been met by an increased redistributive effort, thus keeping the distribution of disposable incomes relatively stable. In other countries, larger market inequality has been accompanied by a reduction in transfers, thus leading to growth in disposable income inequality. Focusing on two constraints on tax and redistribution programs, namely dead weight loss and tax avoidance, our analysis demonstrates that the initial level of market income inequality is crucial in explaining how increased inequality affects redistribution.