The challenge of a rising skill premium for redistributive taxation

Abstract

The present paper analyses the challenge to redistribution programs posed by an increase in skill premium. The increase in skill premium, which we observe in most OECD countries, affects taxation through its effect on education and migration incentives. We demonstrate that in countries with a relatively egalitarian wage distribution, the response to an increased gap in wages is likely to be increased redistributive taxation, whereas the response in countries with a more inegalitarian pre-tax income distribution, is likely to be a reduction in taxation and redistribution.