On Measuring Inequity in Taxation Among Groups of Income Units

Abstract

In this paper a method for analyzing the fairness of an income tax system when portioning the population into heterogeneous socio‐economic groups is proposed. The equitable tax system is defined by the three axioms given by Kakwani and Lambert in 1998 and, as they suggest, inequity is evaluated by the negative influences on the redistributive effect of the tax associated with axiom violations. Measuring the extent of axiom violations among households belonging to different groups, we improve the Kakwani and Lambert analysis, which is able to detect only the existence of overall inequities. We propose a method that allows for evaluation of the contribution of each group to the overall inequity. Moreover, the adopted method enables disentangling the directions of violations. The obtained results allow us to judge how axiom violations discriminate among groups in their reciprocal relationships. An application to the 2010 Italian income tax reveals that inequities disproportionately penalize the household typologies. More precisely, unfairness affects households with children more severely than the other household groups.