Income inequality, tax base and sovereign spreads

Abstract

This note investigates the association of greater income inequality and the tax base, de-facto fiscal space, and sovereign spreads. Using data for the 50 countries in 2007, in 2009 and in 2011, we find that higher income inequality is associated with lower tax base, lower de-facto fiscal space, and higher sovereign spreads. The economic magnitude of these effects is rather large: a 0.01 increase in the Gini coefficient of inequality, is associated in 2011 with a lower tax base of 2 % GDP, and with higher sovereign spread of 45 basis points.