Leveraging tax policy to combat income inequality: Theory, evidence and reform strategies

Abstract

Income inequality has become a defining challenge in both advanced and developing economies, posing serious threats to social cohesion, democratic governance, and sustainable economic growth. Tax policy, as a central component of fiscal policy, plays a critical role in addressing these disparities through its capacity to redistribute income, finance public goods, and shape economic behavior. This article explores the theoretical foundations, empirical evidence, and practical challenges associated with using tax policy as a tool for reducing income inequality. Drawing on both classical and modern economic theory, the paper highlights how progressive taxation, wealth taxes, and equitable indirect tax systems can help mitigate inequality when combined with effective public spending. It also examines the obstacles that hinder implementation, including tax evasion, limited administrative capacity, political resistance, and global capital mobility. Case studies and references underscore the need for integrated, transparent, and inclusive fiscal strategies. The article concludes with policy recommendations emphasizing the importance of progressive tax reform, international cooperation, public trust, and institutional strengthening. Tax policy, if properly designed and implemented, can serve as a powerful instrument for promoting economic justice and long-term development.