Taxation, trade openness and income inequality: evidence from the Baltics

This paper seeks to contribute to the academic discourse on income inequality by evaluating the Baltic region over the period 1995–2022 and proposing targeted policy recommendations. Utilising a panel fixed effects model, the analysis examines the impacts of direct taxes, indirect taxes, and social contributions on income inequality, while also assessing the influence of trade openness and its fiscal interaction terms. Based on panel data sourced from SWIID, Eurostat, the World Bank, and Transparency International, the findings yield several key insights. Contrary to traditional assumptions, direct taxes are found to exacerbate income inequality in the Baltics, whereas indirect taxes display robust equalising effects. Social contributions produce mostly insignificant outcomes. Trade openness exacerbates inequality, while the interaction effects between trade openness and taxation remain statistically insignificant. These findings emphasise the need to curb the shadow economy, address envelope wages, and safeguard the pension framework.