ABSTRACT
This chapter develops a framework in which these different forces on inequality can be assessed. It argues that an analysis of the evolution of pre- and post-tax income inequality in the transition economies of Central and Eastern Europe can be structured and the different forces in play understood through the framework of optimal income taxation. Using a simple two-type and two-sector optimal income tax model with endogenous wages, the chapter shows that a decrease in the public provision could indeed lead to increasing ‘inherent’ inequality, in other words inequality in market incomes. The progressivity of the tax structure is considered as a function of market inequality and revenue requirement. The chapter deploys the Mirrlees model of optimal non-linear taxation to assess the relative impacts of this increase in inherent inequality, the decreasing sources of non-income tax revenue, and possible declines in inequality aversion, to get a numerical feel for their possible impacts on inequality.
