Revisiting the Nexus of Taxes vis-à-vis Inequality: New Insights from Wavelet Coherence Approach Using Top Decile’s Income Share in Australia

We examine the nexus between taxes and income inequality in Australia – using per capita GDP as a control variable over the period 1972-2019. We apply the bi, partial and vector wavelet coherence methodologies to investigate the nature and the direction of coherences between chosen variables to marshal evidence of a complex relationship between taxes and inequality. Our findings are three-fold: first, from 2000 to 2019, per capita GDP significantly leads inequality in higher frequencies (long-run), while in the middle frequency, only after 2015, significant coherence is observed between these two variables. In lower frequencies, or short-run, from 1972 to 1985 and from 2017 onward, significant coherence is observed with the same lead-lag relationship between per capita GDP and inequality. Both partial wavelet and vector wavelet models confirm the time-varying effect of GDP on inequality, which also fluctuated across frequencies. For checking the robustness of our findings, we then extended the analysis to incorporate the effect of resource booms on Australian inequality. Even with resource booms, the central messages of our findings on the nexus between taxes and inequality in Australia remain unaltered, which indicates that Australia enjoys a strong taxation base to fund quality public services and targeted transfers for controlling inequality. JEL Classification: H20; H25; A14; B23; C32