The Effect of Tax Justice on Income Redistribution: Empirical Evidence from OECD Countries

Abstract

Income taxation is theoretically considered one of the most effective and widely used tools of public finance for correcting income inequality. However, its actual redistributive capacity varies significantly across countries and depends on the design of tax instruments. This study isolates the effects of taxation from transfers to examine whether justice-based tax instruments-such as progressive tax rates, minimum living allowance (MLA), and tax credits-enhance redistribution. To empirically assess these relationships, a dynamic panel dataset covering 38 countries (37 OECD members and Bulgaria) between 2005 and 2020 is constructed. The System GMM method is applied to estimate the model. On average, taxation accounts for 26% of total redistribution, and its effect is significantly enhanced by equity-oriented tax policies. A one-point increase in tax progressivity leads to a 0.731-point rise in redistribution (P < 0.01), and tax credits have a similarly significant positive effect (+0.266). In contrast, personal allowances and zero-rate brackets show no statistically meaningful impact. A 10-point increase in the MLA index leads to a 0.4-point reduction in redistribution, suggesting that applying horizontal equity (equal treatment across household types) may undermine efforts to improve vertical equity (reducing income inequality). These findings highlight the importance of designing targeted and fairness-driven tax instruments to strengthen the redistributive role of taxation, beyond dependence on transfer mechanisms.