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Taxation, Reranking and Equivalence Scales

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  • Justin van de Ven

    ()

  • John Creedy

    ()
    (The Treasury)

Abstract

This paper considers whether an equivalence scale implicit in transfer policy can be inferred from summary measures of reranking (whereby the rank order of pre-tax incomes is different from that of the post-tax distribution). It is conjectured that, if the government has a distributional objective and formulates tax policy with a view to equitable treatment of income units, then adopting the scale that is implicit in government transfer policy should identify only the reranking that has no equity foundation. This motivates the question: Is the incidence of reranking associated with a transfer system minimised by the equivalence scale that is implicit in the transfer system? The analysis presented in this paper suggests that the equivalence scale which minimises reranking, while not necessarily equal to the closest approximation to the one that is implicit in transfer policy, is nevertheless in its vicinity.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2003/03-11/twp03-11.pdf
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Bibliographic Info

Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 03/11.

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Length: 31 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:nzt:nztwps:03/11

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Keywords: Adult equivalence scales; reranking; horizontal equity;

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References

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  1. Plotnick, Robert, 1981. "A Measure of Horizontal Inequity," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 283-88, May.
  2. Jenkins, Stephen P & Cowell, Frank A, 1994. "Parametric Equivalence Scales and Scale Relativities," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(425), pages 891-900, July.
  3. Musgrave, Richard A., 1990. "Horizontal Equity, Once More," National Tax Journal, National Tax Association, vol. 43(2), pages 113-22, June.
  4. Coulter, Fiona A E & Cowell, Frank A & Jenkins, Stephen P, 1992. "Equivalence Scale Relativities and the Extent of Inequality and Poverty," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(414), pages 1067-82, September.
  5. Nolan, Brian, 1987. "Direct Taxation, Transfers and Reranking: Some Empirical Results for the UK," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 49(3), pages 273-90, August.
  6. Cowell, Frank A, 1985. "Measures of Distributional Change: An Axiomatic Approach," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(1), pages 135-51, January.
  7. Lerman, Robert I. & Yitzhaki, Shlomo, 1995. "Changing Ranks and the Inequality Impacts of Taxes and Transfers," National Tax Journal, National Tax Association, vol. 48(1), pages 45-59, March.
  8. Jenkins, S., 1988. "Empirical Measurement Of Horizontal Inequity," Papers, Australian National University - Department of Economics 169, Australian National University - Department of Economics.
  9. Aronson, J Richard & Johnson, Paul & Lambert, Peter J, 1994. "Redistributive Effects and Unequal Income Tax Treatment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(423), pages 262-70, March.
  10. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 617-28, October.
  11. Fei, John C H, 1981. "Equity Oriented Fiscal Programs," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 869-81, June.
  12. Gordon, David M, 1972. "Taxation of the Poor and the Normative Theory of Tax Incidence," American Economic Review, American Economic Association, American Economic Association, vol. 62(2), pages 319-28, May.
  13. Jenkins, Stephen, 1988. "Reranking and the Analysis of Income Redistribution," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 35(1), pages 65-76, February.
  14. Christiansen, Vidar & Jansen, Eilev S., 1978. "Implicit social preferences in the Norwegian system of indirect taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 10(2), pages 217-245, October.
  15. Creedy, John & van de Ven, Justin, 2001. "Decomposing Redistributive Effects of Taxes and Transfers in Australia: Annual and Lifetime Measures," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 40(2), pages 185-98, June.
  16. King, Mervyn A, 1983. "An Index of Inequality: With Applications to Horizontal Equity and Social Mobility," Econometrica, Econometric Society, Econometric Society, vol. 51(1), pages 99-115, January.
  17. Banks, James & Johnson, Paul, 1994. "Equivalence Scale Relativities Revisited," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(425), pages 883-90, July.
  18. Robert J. Brent, 1984. "Use of Distributional Weights in Cost-Benefit Analysis: a Survey of Schools," Public Finance Review, , , vol. 12(2), pages 213-230, April.
  19. Kakwani, Nanak & Lambert, Peter J., 1998. "On measuring inequity in taxation: a new approach," European Journal of Political Economy, Elsevier, Elsevier, vol. 14(2), pages 369-380, May.
  20. Mervyn A. King, 1980. "An Index of Inequality: With Applications to Horizontal Equity and Social Mobility," NBER Working Papers 0468, National Bureau of Economic Research, Inc.
  21. Peter Lambert & Xavier Ramos, 1997. "Horizontal Inequity and Vertical Redistribution," International Tax and Public Finance, Springer, Springer, vol. 4(1), pages 25-37, January.
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Citations

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Cited by:
  1. Koeniger, Winfried, 2001. "Labor and Financial Market Interactions: The Case of Labor Income Risk and Car Insurance in the UK 1969-95," IZA Discussion Papers 240, Institute for the Study of Labor (IZA).
  2. John Creedy, 2006. "Evaluating Policy: Welfare Weights And Value Judgements," Department of Economics - Working Papers Series, The University of Melbourne 971, The University of Melbourne.
  3. John Pickering & Duncan Matthews, 1999. "Rule Making in Pursuit of a Single European Market," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 6(3), pages 399-416.
  4. John Creedy & Jamas Enright & Norman Gemmell & Nick McNabb, 2008. "Equity and Efficiency Measures of Tax-Transfer Systems: Some Evidence for New Zealand," Treasury Working Paper Series, New Zealand Treasury 08/04, New Zealand Treasury.

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