The Fiscal Origins of Comparative Inequality Levels: an Empirical and Historical Investigation Andrés Irarrázaval*
Economic History Working Papers No: 314 The Fiscal Origins of Comparative Inequality Levels: An Empirical and Historical Investigation Andrés Irarrázaval November 2020 Economic History Department, London School of Economics and Political Science, Houghton Street, London, WC2A 2AE, London, UK. T: +44 (0) 20 7955 7084. The Fiscal Origins of Comparative Inequality levels: An Empirical and Historical Investigation Andrés Irarrázaval* Keywords: Inequality, redistribution, institutions, colonialism, Latin America and India JEL: D02, D31, D63, D72, F54, H2, H23, N30, O15, O17, P16 Abstract: This research exploits novel evidence on current and historical inequality dynamics, as well as an instrumental variable (IV) strategy (founded on historical settler mortality à la Acemoglu et al.), to document the fundamental role of income redistribution through taxes and transfers in accounting for differences in inequality across regions and historical periods. This research challenges the conventional wisdom about the origins of world-leading inequality levels in Latin America, India or Africa, arguing that inequality is not rooted in the colonial period nor are current inequality levels explained by supposedly persistent “extractive” economic institutions maintaining an unequal playing field. De facto, Latin America, Africa and India have had, in most cases, lower inequality levels than Western countries (i.e. Western Europe and its Offshoots) until the early 20th century. Before this period, no different than in colonized nations, Western countries had a regressive fiscal system which required the poorest taxpayers to fund public services that benefited richer households. The IV strategy, and the evidence on inequality dynamics, both indicate that contemporary inequality differences are a product of the 20th century.
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