Redistributive effect, progressivity and differential tax treatment: Personal income taxes in twelve OECD countries

Abstract

This paper decomposes the redistributive effect of the personal income taxes (PITs) of twelve OECD countries into four components: (i) an average rate effect, (ii) a departure-from-proportionality or progressivity effect, (iii) a horizontal equity effect and (iv) a reranking effect. The product of (i) and (ii) indicates the vertical redistribution associated with the PIT and the sum of (iii) and (iv) indicates the impact on the distribution of income of differential tax treatment. The average tax rate is found to be low in France and high in the Nordic countries, and the PIT is found to be most progressive in France, Ireland and Spain, and least progressive in Denmark and Sweden. Taking (i) and (ii) together, Denmark and the US achieve broadly similar levels of vertical redistributive effect. Differential treatment is found to have a much smaller effect on income redistribution (as a proportion of redistributive effect) than the vertical redistribution caused by progressivity, though there are differences between countries. These differences appear to be due principally to a different emphasis on deductions, such as tax deductibility of mortgage interest payments and insurance premiums, and on local income tax.