The last 20 years have seen a significant evolution in the literature on horizontal inequity (HI) and have led to two major and "rival" methodological strands, namely, classical HI and reranking. We propose in this paper a class of ethically flexible tools that integrate these two strands. This is achieved using a measure of inequality that merges the well-known Gini coefficient and Atkinson index, and that allows a decomposition of the total redistributive effect of taxes and transfers into a vertical equity effect, a loss of redistribution due to classical HI, and a loss of redistribution due to reranking. An inequality-change approach and a money-metric cost-of-inequality approach are developed. The latter approach makes aggregate classical HI decomposable across socio-economic groups and percentiles. As in recent work, equals are identified through a nonparametric estimation of the joint density of gross and net incomes. An illustration using Canadian data from 1981 to 1994 shows a substantial, and increasing, robust erosion of redistribution attributable both to classical HI and to reranking, but does not reveal whether reranking is more or less important than classical HI, since this requires a judgement that is fundamentally normative.
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Paper provided by Université Laval - Département d'économique in its series Cahiers de recherche with number
0002.
Find related papers by JEL classification: C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
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Yitzhaki, Shlomo, 1983.
"On an Extension of the Gini Inequality Index,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 617-28, October.
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