Tax Progressivity and Redistribution Effect of Taxes

Abstract

AbstractEfficiency and equity are the fundamental principles of taxation. This chapter concerns equity in taxation, focusing on the distribution of the tax burden. The measures of tax progressivity and the redistributive effect of taxation are metrics widely used to assess the fairness of taxes. This chapter has utilized the three equity axioms, also called equity principles, to derive the tax progressivity and redistributive effect measures. The violation of any equity principles exerts negative influences on the redistributive impact of the tax. These negative influences on the redistributive effect on the tax provide the means to characterize the type of inequity present in a tax system and assess its significance. The chapter has analyzed the degree of inequities in the Australian tax system. Inequity in taxation can arise when systematic discrimination against a social group in tax payment exists. Tax discrimination happens when different social groups face different tax schedules. This chapter demonstrates that tax discrimination against any social group results in necessary social welfare loss. The dollar loss of social welfare quantifies the magnitude of discrimination. The chapter has extended the idea of tax discrimination to designing government relief packages in response to the COVID-19 pandemic. Using Brazilian data, the chapter has illustrated the calculation of social welfare loss caused by excluding some social groups from the relief package. This illustration demonstrates that discrimination can cause significant welfare loss to society.