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Decomposing Redistributive and Reranking Effects to Reveal Contributions of Taxes and Benefits

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Name of the Asset | Decomposing Redistributive and Reranking Effects to Reveal Contributions of Taxes and Benefits
Type of Asset | Working Paper
Date | December 2011

Summary

Since the 1970s, when major methodological advancements in the measurement of inequality and progressivity emerged, there has been a huge empirical interest in evaluating how fiscal systems affect income distribution.  This paper uses a  “micro approach” to calculate indices and their decompositions, by analyzing differences in incomes, taxes, and benefits for pairs of income units. These differences are then aggregated across the population and averaged. The methodology is applied in an analysis of the Croatian system of direct taxes and cash social benefits. This approach is much more suitable for scrutinizing various income transitions emerging from fiscal activities than the usual apparatus of Lorenz and concentration curves. It finds that all fiscal instruments included in the analysis reduce distances between income units are inequality-reducing. The most important are public pensions, SSC for pension and health funds, and PIT. Looking at the “full system”, the “amounts” approach says that SSC and PIT account for 75% of distance narrowing, while the “deviations” approach says that public pensions deliver 98% of deviations from proportionality. This is the empirical confirmation of the puzzle about how the two approaches ascribe relative importance to taxes and benefits. Concerning deprivation from reranking, the picture is much less ambiguous: public pensions are overwhelmingly responsible for it, independently of the chosen approach. On the other hand, instruments such as PIT, basic personal allowance, and child allowance create quite acceptable quantities of reranking.

Authors | Ivica Urban
Country and/or Region | Southeast Europe
Name of the Program | Regional Research Competition
Funder(s) |  Jubiläumsfonds of the Austrian National Bank (OeNB) and the Austrian Ministry of Finance

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