Taxation and Income Inequality: The Government's Role in Economic Parity

Income inequality is an issue that every country is currently facing that has a negative impact on most societies in a multifaceted way. As a complex fiscal issue, one of the ways to counter this increasingly relevant phenomenon is with curated tax policies put into place by federal governments, specifically with the progressive income tax rate structure, an important tool to mitigate income inequality. This thesis presents analysis and a review of the relevant literature to assess the design of income tax rate structures with respect to reducing income inequality and improving quality of life for a country’s citizens. The factors analyzed include the progressive income tax structure, corporate income tax structure, and the societal ramifications that these policies result in. Comparisons are made between the income tax rate structure and the income inequality metrics between the U.S. and Canada. While there is disagreement in prior literature, there seems agreement that higher tax progressivity coupled with a minor reduction in corporate income tax would reduce income inequality to a certain extent. The impact of these policies on the quality of life of a country’s citizens is also discussed when it comes into conflict with income inequality.