Abstract
We compare the tax burden distribution across incomes and the income share distribution, based on a stochastic dominance approach. We find conditions to assess the progressivity of different sources of taxes, given knowledge of the income share elasticities, which measure the relative marginal change in the income share accruing to each class of income, associated to a marginal increase in income. We first consider a simple setting with only indirect taxes and then extend it to savings and direct taxation. The progressivity of a given set of taxes depends on the correlation between the relative incidence of the different sources of taxation and the income elasticity of household net expenditure. We use this approach to test empirically for the progressivity of the fiscal system.
Highlights
The distributional impact of taxation on individual and household choices is an important issue for policy makers, which has become prominent, given the recent trends of growing income inequality
We use a methodology based on the income share elasticity that allows to assess the conditions for the progressivity of a given set of taxes looking at the stochastic dominance relationship of the income distribution and different specification of the tax burden distribution (VAT, personal income tax, saving tax, and the overall tax burden)
We find clear cut conditions based on the correlation among the incidence of the different source of taxes and the expenditure elasticity that allows us to rank the tax burden distribution relative to the different notion of income considered
Summary
The distributional impact of taxation on individual and household choices is an important issue for policy makers, which has become prominent, given the recent trends of growing income inequality. As far as the payroll system is concerned, there is some debate on whether contributory pensions should be treated as a source of direct taxation, or just as savings providing deferred income once retired (Inchauste and Lustig 2017) This piecemeal approach has been historically dominant, there has been recently a spate of works on the overall redistributive effect of the whole taxation system, including transfers The notion of income share elasticity lends itself quite naturally to analyzing progressivity issues: once the distributions of income and tax shares are both described in elasticity terms, assessing progressivity boils down to a convenient elasticity comparisons leading to stochastic dominance ranking.6 We use this approach to test for the progressivity of different taxes in the Italian system.
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