Same Income, Different Taxes: The Growing Inequality Between Workers Explained

The study shows that people with the same income, especially self-employed vs salaried workers, often pay very different taxes due to enforcement gaps, creating major unfairness. It also finds that while citizens recognize this inequality, they prefer better enforcement over changing tax policies, highlighting a key challenge for governments.

A quiet imbalance runs through tax systems in many developing countries, and it is not about the rich versus the poor. A recent World Bank study, produced with researchers from institutions such as the Harvard Kennedy School and the National Bureau of Economic Research, shows that people earning the same income often pay very different taxes depending on how they earn it. Salaried employees and self-employed workers are treated differently in practice, even if the law appears equal on paper.

The difference comes down to enforcement. Salaried workers usually have taxes deducted directly from their wages, making it hard to avoid paying. Self-employed individuals, however, often report their own income, which creates room for underreporting. This gap in enforcement leads to a situation where two people earning the same amount can end up paying very different taxes.

Why Self-Employed Workers Pay Less

The study finds that self-employed individuals often report only part of their income, while salaried workers report almost everything. As a result, the self-employed pay significantly less tax. Among high earners, this difference can be large, sometimes several percentage points of income.

What makes this more serious is how common self-employment is in developing countries. In many cases, a large share of top earners are self-employed. This means the problem is not limited to a small group but affects a large portion of the economy. The result is a widespread form of inequality that is often overlooked.

A Tough Trade-Off for Governments

Governments face a difficult choice when designing tax policies. Many experts recommend raising income taxes to make the system more progressive, meaning the rich pay more. But income taxes are easier to enforce on salaried workers than on the self-employed. So when income taxes rise, salaried workers often bear a larger burden, while others continue to avoid taxes.

On the other hand, consumption taxes, such as sales taxes, are harder to avoid because everyone pays them when they buy goods and services. These taxes tend to treat people more equally, but they are less progressive because they also affect lower-income households.

This creates a trade-off. Policies that improve fairness between income groups can worsen fairness between people earning the same income. Governments must balance these competing goals, and there is no simple solution.

What People Think About Tax Fairness

To understand public opinion, researchers conducted surveys in countries such as Pakistan, India, Indonesia, Nigeria, Colombia and the Philippines. The results show that people are aware of the problem. Most believe that self-employed individuals pay less tax and that governments find it harder to enforce rules on them.

Many also see this as unfair. People generally agree that those earning the same income should pay similar taxes. However, when participants were given clear information about the size of the gap, their concern increased, but their policy preferences did not change much.

This reveals an important gap between what people feel and what they support. Even when they see inequality as unfair, they are not always willing to back policies that could reduce it.

The Real Challenge: Enforcement and Trust

One reason for this gap is how people view the role of government. Many believe that authorities could reduce tax evasion if they tried harder. Because of this, they prefer stronger enforcement over changing tax policies. They do not see the trade-off between different types of taxes as unavoidable.

For policymakers, this creates a major challenge. Expanding income taxes may be necessary to raise revenue, but it can appear unfair if only certain groups are forced to comply. This can weaken trust in the system and reduce willingness to pay taxes.

The study suggests that improving enforcement is key. Better systems for tracking income, stronger reporting rules and the use of digital tools could help ensure that everyone pays their fair share. Without such changes, tax reforms may continue to face resistance.

The research highlights a simple but powerful idea: fairness in taxation is not just about how much the rich pay compared to the poor. It is also about whether people in similar situations are treated equally. Addressing this hidden inequality may be essential for building trust and creating stronger, more effective tax systems.