Unbundling the effect of political instability on income redistribution

The main objective of this study is to investigate potential political barriers to fostering an egalitarian redistribution of income within an economy. It empirically establishes that countries characterized by the prevalence of political instability are less likely to adopt progressive income redistribution. Employing data for up to 143 countries between 1996 and 2015, I consistently find evidence that political instability has a negative impact on effective fiscal redistribution, captured by the difference between market and net income inequality. Further analyses indicate that the economic and statistical significance of the redistributive impact of political instability is stronger in non-democratic and highly diverse societies, and low-income economies. Hence, the detrimental effect of political uncertainty on effective fiscal redistribution appears to hold only in non-democratic, fragmented and low-income countries. The findings imply that reducing political instability contributes to establishing an egalitarian redistribution of income, potentially leading to less income inequality.