Does inequality impact tax collection? : evidence from ACI (ASEAN-China-India) economies

This study examines the short-run and the long-run relationships between inequalities - measured by the (income) Gini coefficient - and taxes, using a panel of ten selected Asian countries from 1993 to 2015. After testing for the applicability of several econometric models of the panel Autoregressive Distributed Lag (ARDL) methodology, we choose the Pooled Mean Group (PMG) estimator to find that an increase in income Gini increases the tax-GDP ratio for the ACI economies in the long run. However, we also note that the income Gini has no (statistically significant) effect on taxes in the short run. The chain of causality is found to run from income inequalities to taxes and not from taxes to inequalities. This study confirms the prediction of the median voter hypothesis on the consequences of income distribution: greater inequality is associated with a larger tax-GDP ratio because of the greater redistribution that is sought by the median voter when income distribution is less equal.