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The Norwegian Tax Reform; Distributional Effects and the High-income Response

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  • Karl Ove Aarbu
  • Thor Olav Thoresen

    ()
    (Statistics Norway)

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    Abstract

    Are we better or worse off after the Norwegian tax reform of 1992 and how has the reform influenced the income sizes and the distribution of total income? This question denotes our twofold analysis in this paper. We first examine the trends in average income and income distribution in the period from 1991 to 1994. Second, we ask whether the tax reform can explain parts the observed income changes. Calculations from a tax-benefit model, assessing the direct distributional effect by applying post-reform tax rules on pre-reform data, do not predict any substantial increase in income inequality due to the tax reform of 1992. However, we find a significant post-reform increase in observed income inequality, while average income is about unaltered in the period. The increased inequality might be explained by the high income earners’ response to large reductions in marginal tax rates. By applying panel data for 1991-1994 and a methodological approach developed by Feldstein (1995a), we find no evidence in support of significant behavioral responses due to decreased marginal tax rates on income. In fact, the overall elasticities are around zero, which differ substantially from Feldstein’s estimate of 1.04, based on US-data. Other explanations, as the changes in the taxation of dividends, are discussed.

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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 207.

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    Date of creation: Dec 1997
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    Handle: RePEc:ssb:dispap:207

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    Keywords: Tax reform; Income distribution; Social welfare; Personal tax;

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    References

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    1. Martin Feldstein & James M. Poterba, 1996. "Empirical Foundations of Household Taxation," NBER Books, National Bureau of Economic Research, Inc, number feld96-1, October.
    2. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
    3. Morris, Nick & Preston, Ian, 1986. "Inequality, Poverty and the Redistribution of Income," Bulletin of Economic Research, Wiley Blackwell, vol. 38(4), pages 275-344, November.
    4. Shorrocks, Anthony F, 1983. "Ranking Income Distributions," Economica, London School of Economics and Political Science, vol. 50(197), pages 3-17, February.
    5. Hans-Werner Sinn, 1991. "Taxation and the Cost of Capital: The "Old" View, the "New" View and Another View," NBER Working Papers 3501, National Bureau of Economic Research, Inc.
    6. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
    7. repec:fth:stanho:e-90-11 is not listed on IDEAS
    8. King, Mervyn A., 1983. "Welfare analysis of tax reforms using household data," Journal of Public Economics, Elsevier, vol. 21(2), pages 183-214, July.
    9. Thor Olav Thoresen, 1995. "The Distributional Impact of the Norwegian Tax Reform Measured by Disproportionality," Discussion Papers 146, Research Department of Statistics Norway.
    10. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier.
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    Cited by:
    1. Thor O. Thoresen & Karl Ove Aarbu, 1999. "Income Responses to Tax Changes – Evidence from the Norwegian Tax Reform," Discussion Papers 260, Research Department of Statistics Norway.
    2. Andreas Bergh, 2008. "Explaining the Survival of the Swedish Welfare State: Maintaining Political Support Through Incremental Change," Financial Theory and Practice, Institute of Public Finance, vol. 32(3), pages 233-254.
    3. Thor O. Thoresen, 2002. "Reduced Tax Progressivity in Norway in the Nineties The Effect from Tax Changes," Discussion Papers 335, Research Department of Statistics Norway.
    4. Bergh, Andreas, 2006. "Explaining Welfare State Survival: The Role of Economic Freedom and Globalization," Ratio Working Papers 101, The Ratio Institute.

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