Pre-tax Income Distribution Research Articles

On measuring axiom violations due to each tax instrument applied in a real-world personal income tax

In their seminal paper, Kakwani and Lambert (Eur J Polit Econ 14:369–380, 1998) state three Axioms an equitable tax system should respect. By proposing a measurement system based on re-ranking indexes of taxes, tax rates and post-tax incomes, they show how to evaluate the negative influences that Axiom violations exert on the redistributive effect of a tax. By considering each element of a real-world personal income tax, i.e. deductions and tax credits as well as statutory tax rates, in this study we take a theoretical step further by decomposing the magnitude of the three Axiom violations produced by all these tax elements. We propose two complementary strategies. The first one is a ‘stepwise’ decomposition computing the effect of each element of the tax on the redistributive effect when they are sequentially applied; the second strategy is an ‘overall and simultaneous’ decomposition always evaluating the effect of small changes in deductions, tax rates and tax credits with respect to the pre-tax income distribution, once all the three tax instruments have been simultaneously applied. These strategies can be more suitable and effective in measuring the loss of the redistributive effect produced by each tax element because of axiom violations. We also show that they can give different information on the existing inequities of the tax. We finally emphasize the goodness of our approach by applying it to a real world personal income tax.

Is property driving income distribution? – An analysis of the linkage between income and wealth in Finland, France and Spain

In this article, the link between financial wealth and pre-tax household income distribution is scrutinised for three European countries using a conceptually fully consistent macro framework. First, national balance sheets are combined with the related income flows. After this, income flows that are not property income but that are considered part of national income (e.g., wages and salaries) are added, the national income flows are broken down by institutional sector, and the household sector income flows separated. Finally, distributional household microdata are used to break down the aggregate household sector income flows by income decile. The article utilises this framework to analyse the evolution of rates of return and capital and labour shares, as well as the way in which the property income flows created by financial wealth have affected household primary income distribution.

Blum and Kalven at 50: Progressive Taxation, “Globalization,” and the New Millennium

Almost 50 years ago, Walter Blum and Harry Kalven described the case for progressive taxation as "stubborn but uneasy." This article considers the extent to which that conclusion remains valid five decades later. I argue that the case for progressivity is today even more uneasy than in Blum and Kalven's time, as a result of three principal developments: a more conservative political environment, which is generally hostile to redistributive measures; the femininization and minoritization of poverty, which make it easier to rationalize inequality and tend to divide the constituencies in favor of progressive measures; and the globalization of economic life, which suggests that a progressive rate structure may cause the country to lose business to other nations. These developments challenge both the philosophical underpinnings of progressive taxation, which is based on liberal assumptions that are now severely contested, and its political support, which flowed from a Cold War consensus that now no longer exists. Globalization is particularly significant, for it suggests a practical as well as a theoretical limit on progressive taxation, and raises the specter that progressivity may be swimming against the historical tide.These same developments also present an opportunity. If supporters of progressivity can confront the changes described above and if they can adjust their arguments to the realities of the Twenty-First Century, then the case for progressivity may yet prove stronger than in Blum and Kalven's era. However, to accomplish this progressivity supporters must change both their rhetoric and research agenda.On a rhetorical level, scholars must make a more candid and forceful case for progressivity as a means of redistribution, emphasizing the unfairness of today's "winner-take-all" society and the role of irrelevant factors such as race, gender, and immigrant status in pretax income distributions. These arguments suggest that, far from being inconsistent with a dynamic, merit-based society, progressive taxation may be necessary in order to preserve it. Progressive taxation should be especially attractive to those who object to affirmative action and similar race-conscious programs but support redistribution based on economic or financial status.

Measuring the Redistributive Capacity of Tax Policies

This paper presents a novel technique to measure and compare the redistributive capacity of observed tax (or transfer) policies. The technique is based on income distribution simulations and controls for differences in pre-tax income distributions. It assumes that the only information on the pre-tax distribution available in each country-year is the Gini coefficient and the mean (GDP per capita). We illustrate the technique with an application to the personal income tax, using a dataset of 108 countries over the 2007-2018 period.

Public Economics and Inequality: Uncovering Our Social Nature

This paper argues that the social nature of humans, absent from the standard economic model, is crucial to understand our large modern social states and why concerns about inequality are so pervasive. A social solution arises when a situation is resolved at the group level (rather than the individual level) through cooperation and fair distribution of the resulting surplus. In human societies, childcare and education for the young, retirement benefits for the old, health care for the sick, and income support for those in need, is resolved at the social level, and through the social state in advanced economies. Social situations are pervasive even outside government and play a significant role in the distribution of pre-tax market incomes.

The rich and mobility: A new look into the impacts of income inequality on household transport expenditures

An increasing interest in transport affordability has brought attention to the factors driving household transport expenditure. Existent income inequality is part of what drives this interest. However, the possible causal link between income distribution and household transport expenditure is scarcely studied in the literature. In addition, the few existing studies only focus on post-tax income distribution. This paper provides the first known analysis that includes both pre-tax and post-tax income distribution, and a specific focus on the richest one percent. Random effects regressions and instrumental variables are used to analyse panel data covering 14 OECD countries during the 1992–2016 period. Inequality has an effect on overall household transport expenditure, and more specifically on purchase of vehicles and operation of private transport equipment. The pre-tax share of the rich increases overall expenditure on purchases of new private vehicles, with a decreasing effect when market inequality is high. The post-tax share of the poor has an effect on operation of transport equipment, but the sign of this effect depends on the existent level of post-tax inequality.

Income Tax Progressivity: Trends and Implications

AbstractThis paper discusses how the structure of the tax system affects its progressivity. It suggests a measure of progressive capacity of tax systems, based on the Kakwani index, but independent of pretax income distributions. Using this and other progressivity measures, the paper (i) documents a decline in progressivity over the last decades and (ii) examines the relationship between progressivity and economic growth. On this relationship, regressions do not reveal a significant impact, suggesting that efficiency costs may be small – at least for degrees of progressivity observed in the sample. Finally, the paper finds that increasing tax progressivity reduces pretax inequality.

Taxes and Rents: The Power of Tax Policy to Shape the Distribution of Pre-Tax Income

Much of the legal academic tax policy analysis of the last 40 years inhabits the “classical optimal tax framework,” in which desires for government spending and redistribution are balanced against the theoretical economic costs of high tax rates. While this analytic frame can be useful, it has historically been anchored to antiquated assumptions that are contrary to modern economic research. The result has been a literature that overemphasizes the theoretical economic costs of taxation, while radically underestimating the role of taxes in regulating economic inequality. This article brings together recent advances in the economics literature with evidence from other disciplines to make the case that, rather than discouraging productive activity, progressive tax rates may instead discourage rent-seeking behaviors by high-income workers, leaving more compensation on the table for lower-income workers to share. In this way, progressive tax policy can be understood not only as redistributing income through direct transfers ex post, but also as regulating the distribution of market income ex ante, with high marginal tax rates reducing market-income inequality, and comparatively low rates encouraging the upward redistribution of resources. The article situates these insights within the broader tax literature and demonstrates their profound ramifications for multiple areas of tax scholarship.

Personal Income Tax Progressivity: Trends and Implications

This paper discusses how the structure of the tax system affects its progressivity. It suggests a measure of progressive capacity of tax systems, based on the Kakwani index, but independent of pre-tax income distributions. Using this and other progressivity measures, the paper (i) documents a decline in progressivity over the last decades and (ii) examines the relationship between progressivity and economic growth. Regressions do not reveal a significant impact of progressivity on growth, suggesting that efficiency costs of progressivity may be small—at least for degrees of progressivity observed in the sample.

Personal Income Tax Progressivity: Trends and Implications

This paper discusses how the structure of the tax system affects its progressivity. It suggests a measure of progressive capacity of tax systems, based on the Kakwani index, but independent of pre-tax income distributions. Using this and other progressivity measures, the paper (i) documents a decline in progressivity over the last decades and (ii) examines the relationship between progressivity and economic growth. Regressions do not reveal a significant impact of progressivity on growth, suggesting that efficiency costs of progressivity may be small—at least for degrees of progressivity observed in the sample.

Distributional National Accounts: Methods and Estimates for the United States*

This article combines tax, survey, and national accounts data to estimate the distribution of national income in the United States since 1913. Our distributional national accounts capture 100% of national income, allowing us to compute growth rates for each quantile of the income distribution consistent with macroeconomic growth. We estimate the distribution of both pretax and posttax income, making it possible to provide a comprehensive view of how government redistribution affects inequality. Average pretax real national income per adult has increased 60% from 1980 to 2014, but we find that it has stagnated for the bottom 50% of the distribution at about $16,000 a year. The pretax income of the middle class—adults between the median and the 90th percentile—has grown 40% since 1980, faster than what tax and survey data suggest, due in particular to the rise of tax-exempt fringe benefits. Income has boomed at the top. The upsurge of top incomes was first a labor income phenomenon but has mostly been a capital income phenomenon since 2000. The government has offset only a small fraction of the increase in inequality. The reduction of the gender gap in earnings has mitigated the increase in inequality among adults, but the share of women falls steeply as one moves up the labor income distribution, and is only 11% in the top 0.1% in 2014.

Top after tax incomes

The purpose of this article is to present some data on top after-tax incomes in New Zealand. Thus it is a companion to the preceding article in this Policy Quarterly, ‘Distribution of pre-tax top personal incomes’, which looked at before-tax incomes. That article found that there had been little change after 1981 in the market (before-tax) income shares of those on top incomes. This article reports that, nevertheless, those on top incomes had dramatic increases in their after-tax incomes and shares of total after-tax income in the late 1980s and early 1990s. Since there was no change in pre-tax market income shares, these increases were due to changes in relative tax rates.

A Note on Voting over Taxes with Tax Avoidance

We study majority voting over taxes when tax avoidance is possible, focusing on the progressivity of effective tax burdens and how government policy can affect it. We show that: (1) whether effective tax burdens are progressive or not depends on the distribution of individuals' pre-tax income, the per capita government revenue requirement, and the government enforcement level; and (2) both a lower per capita government revenue requirement and a higher government enforcement level can help ensure that effective tax burdens are progressive.

Some considerations on measuring the progressive principle violations and the potential equity in income tax systems

Kakwani and Lambert (1998) state three axioms which should be respected by an equitable tax system; then they propose a measurement system to evaluate at the same time the negative influences that axiom violations exert on the redistributive effect of taxes, and the potential equity of the tax system, which would be attained in absence of departures from equity. The authors calculate both the potential equity and the losses due to axiom violations, starting from the Kakwani (1977) progressivity index and the Kakwani (1984) decomposition of the redistributive effect. In this paper, we focus on the measure suggested by Kakwani and Lambert for the loss in potential equity, which is due to violations of the progressive principle: the authors’ measure is based on the tax rate re-ranking index, calculated with respect to the ranking of pre-tax income distribution. The aim of the paper is to achieve a better understanding of what Kakwani and Lambert’s measure actually represents, when it corrects the actual Kakwani progressivity index. The authors’ measure is first of all considered under its analytical aspects and then observed in different simulated tax systems. In order to better highlight its behaviour, simulations compare Kakwani and Lambert’s measure with the potential equity of a counterfactual tax distribution, which respects the progressive principle and preserves the overall tax revenue. The analysis presented in this article is performed by making use of the approach recently introduced by Pellegrino and Vernizzi (2013).

Occasionally Libertarian: Experimental Evidence of Self-Serving Omission Bias

People evaluate outcomes, in part, by how those outcomes came about and who caused them. For example, attitudes about the proper amount of redistributive taxation reflect beliefs about the causal roles played by luck and human agency in creating the pre-tax income distribution. Causal attribution, however, is a process both complicated and subject to bias. I generate individual-level data from a variation on the dictator game in which the participants' initial endowments are manipulated to identify one aspect of how people care about causal attribution. The data are inconsistent with models of preferences defined solely over outcomes and also with a general bias toward inaction. Subjects care independently, but conditionally, about the effects of their own actions and demonstrate a bias toward inaction only when it is in their self-interest. (JEL A12, A13, C91, D63) The Author 2013. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

On measuring violations of the progressive principle in income tax systems

Kakwani and Lambert (Eur J Polit Econ 14(2):369–380, 1998) state three axioms which should be respected by an equitable tax system. Using the Atkinson–Plotnick–Kakwani re-ranking indexes of taxes, tax rates, and post-tax incomes, calculated with respect to the ranking of pre-tax income distribution, they then propose a measurement system to evaluate the negative influences that axiom violations exert on the redistributive effect of taxes. In this paper, we reconsider the way Kakwani and Lambert measure violations of their second axiom, which concerns the re-ranking of tax rates. We construct a non-negative index which is strictly faithful to Kakwani and Lambert’s commands; we show that the Authors’ measure does not exactly fit the statements made in their second axiom. Both Kakwani and Lambert’s original measurement system and the modified one are then applied to Italian personal income tax in 2008. According to the modified measurement system, the average tax rate seems to play a smaller role than that suggested by the results gained using Kakwani and Lambert’s original methodology.

Welfare State’s Redistributive Effect Is Exaggerated

This article questions traditional analysis of the redistributive effect of the welfare state and investigates how large the effect would be with a realistic alternative for comparison. The most commonly used reference point is the zero-government counterfactual that measures redistributive effect of social policy against distribution of pre-tax and pre-transfer income. But it is impossible to ignore the fact that some form of transfer is necessary. The elderly and sick, for example, must have their means of support organised in a way other than via the public transfers under investigation. This article shows that when using an adequate alternative for comparison, social policy impact on income distribution is significantly smaller.

Amortissement fiscal et redistribution dans un modèle de croissance néoclassique

Résumé L’article analyse si le couplage de la déduction fiscale pour amortissement et de l’impôt sur le revenu du capital peut être utilisé comme un instrument efficace de redistribution dans une perspective de long terme. L’analyse s’effectue dans une économie simple où coexistent deux types d’agents, les détenteurs du capital et les travailleurs. Dans la courte période, un amortissement fiscal accéléré est favorable à la croissance et peut stabiliser l’investissement lors d’une récession, mais est généralement néfaste à la redistribution. Le résultat inverse est obtenu pour la taxation des revenus du capital. Toutefois, quand le secteur privé et le gouvernement agissent de manière optimale, l’amortissement optimal du capital est maximal dans le long terme, puisque la distorsion induite par la taxation des revenus du capital est totalement compensée. De plus, la taxation optimale des revenus du capital et donc la redistribution, peuvent être non nulles. Cela dépend du poids dans la fonction d’utilité sociale des bénéficiaires de transferts sociaux, de la distribution des revenus avant impôt, de l’élasticité inter-temporelle de substitution et de la préférence pour le présent. Dès lors, l’amortissement accéléré, abondamment utilisé lors de la récente crise économique est aussi un instrument indirect de redistribution.

Flat rate taxes and relative poverty measurement

We provide a systematic analysis of the impact of revenue-neutral changes to the parameters of a flat rate tax system on the level of relative poverty (where the poverty line is some fraction of either the mean or the median post-tax income level). We also perform a similar analysis for a negative income tax system. We find that the choice of poverty line type has important consequences in respect of how changes to the tax parameters affect the level of relative poverty. Our results are illustrated with a numerical simulation, in which we allow the pre-tax income distribution to be either given exogenously or determined endogenously.

Public goods provision, inequality and taxes

The impact of redistributive policies on voluntary contributions is still not well understood. While a higher level of redistributive taxation decreases the price of voluntary giving, it also changes the income distribution by decreasing income inequality. This paper provides a controlled laboratory experiment to investigate the net impact of the tax rate on public goods provision. The experimental findings show that while the participants decrease their voluntary contributions as the pre-tax income distribution becomes more equal, they increase their contributions with taxation. These findings have important implications for government policies regarding privately provided public goods.