​Economics Seminar | Progressivity and Development

Our contribution is threefold. First, using micro data from 28 countries including the poorest and the richest in the world we document (i) a negative relationship between the ability to insure consumption against income shocks and economic development and (ii) a negative relationship between the degree of tax progressivity and the stage of development. Importantly, the computation of tax progressivity includes formal (public) and informal (private) net transfers across households, which is particularly relevant for poor countries. Second, to capture these facts we propose a macroeconomy with idiosyncratic income shocks in which agents accumulate physical and human capital (through learning-by-doing) and face a progressive income tax function that depends on the stage of development. We find that tax progressivity goes a long way in explaining the larger ability to insure consumption in poor countries than in rich countries. Third, we use this economy to assess the role of tax progressivity in explaining income per capita and welfare differences across countries. Our preliminary results suggest an important role for progressivity in explaning income and welfare differences across countries.