twentieth century, and it remains important for ensuring the viability of the social state in the future. Similarly, Atkinson (2015) advocates for increased taxation, including progressive taxes, as an essential strategy to mitigate inequality. These perspectives highlight that not only the amount of tax collected but also the way it is structured plays a crucial role in shaping economic equity.

Tax systems in low-income countries are not sufficiently progressive and may be detrimental to the poor. Thus, better inclusive growth outcomes can be achieved by enhancing the quality of the tax structure. A World Bank report (2022) highlights that, in most low- and middle-income countries, fiscal policy does not support poor households. In these countries, consumable income (income after direct and indirect taxes have been paid and cash transfers and subsidies have been received) is often less than market income (income before any taxes have been paid or transfers or subsidies received), whereas in high-income countries, the poorest households have 60 percent more consumable income than market income. Richer countries can manage to collect more revenue (as a share of GDP) and support poorer households by using a mix of fiscal instruments. They rely heavily on direct income taxes, which place a greater burden on wealthier households, and support poorer households through well-targeted transfers. Indeed, Jensen (2022) shows that the modern tax system arises over development with the income tax threshold shifting down the income distribution as countries develop. In contrast, non-OECD countries predominantly use indirect taxes on consumption—such as value-added taxes and good and services taxes—which burden everyone and often fail to adequately support the poor. Indeed, countries with higher tax capacity (proxied by higher tax to GDP ratio), tend to have higher share of direct taxes (figure 7A). Regional studies on Latin American economies demonstrate that progressive taxation, through increased direct taxes, leads to better equality outcomes (Martorano, 2018; Tsounta and Osueke, 2014; Cornia et al., 2011) while noting that the effectiveness in promoting equity is limited due to lower tax capacity (Martorano, 2018).

A progressive tax system can also promote growth through reduced inequality. The impact of tax progressivity on economic growth depends on how tax revenues are used and the economic context. Potential downsides, such as reduced work and investment incentives, can be mitigated by funding productive public investments and reducing inequality. Theory suggests that reducing inequality fosters economic growth by mitigating under-investment in human capital because of credit market imperfections (Galor and Zeira, 1993) and by lowering high fertility rates among the poor, which hinders human capital accumulation (de la Croix and Doepke, 2003). Conversely, some argue that inequality can spur growth by fostering innovation and entrepreneurship (Lazear and Rosen, 1981), increasing savings and investments (Kaldor, 1957), and creating business and education opportunities (Barro, 2000). While theoretical perspectives vary, empirical research supports the notion that lower inequality is associated with faster and more durable growth (Berg et al., 2018). Banerjee and Duflo (2003), while inconclusive about the negative impact of inequality on growth based on macro data, advocate for micro studies; for instance, Banerjee et al. (2001) show evidence from Indian cooperatives that those with the highest inequality in land ownership are the least productive.

total taxes correlates with reduced inequality. The choice of the progressivity measure results from data availability and ability to measure progressivity of the tax system that requires details on a tax incidence by tax type and micro data at household and firm level. Thus, the measure should be 12