Tax structure, economic globalization and income inequality in developing countries

This study examines how tax structure affects income inequality in developing countries, focusing on the relative shares of two major tax categories: taxes on goods and services (proxy for indirect taxes) and taxes on income, profits, and capital gains (proxy for direct taxes). Using an unbalanced panel of 59 developing countries over the period 1995 to 2021, we analyze the heterogeneous effects of these tax components on income inequality. The results show that indirect tax is positively associated with income inequality, and this inequality-enhancing effect is stronger in countries with higher levels of income inequality. In contrast, direct tax is negatively associated with income inequality on average. However, for countries with very low levels of income inequality, the effect of direct tax becomes positive, suggesting important distributional heterogeneity across country groups. We further examine the moderating role of economic globalization and find that globalization amplifies the inequality-reducing effect (i.e., makes less negative the impact) of direct tax, while it does not exert a statistically clear moderating effect on the relationship between indirect tax and income inequality. These findings highlight that the distributional consequences of tax structure in developing countries are context-dependent and shaped by both initial inequality conditions and external economic integration.