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The Decomposition of the Redistributive Effect and the Issue of Close Equals Identification

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Author Info

  • Edyta Mazurek

    ()
    (Department of Statistics, Wroclaw University of Economics)

  • Simone Pellegrino

    ()
    (Department of Economics and Public Finance "G. Prato", University of Torino)

  • Achille Vernizzi

    ()
    (Department of Economics, Business and Statistics, University of Milan)

Abstract

Urban and Lambert (2005, 2008) present an exhaustive summary and an in-depth discussion of the literature contributions about the decomposition of the redistributive effect of a tax (RE). The authors discuss the indexes available in the literature for the potential vertical effect (V), the loss due to horizontal fairness violations (H) and that due to re-rankings (R); they also introduce new indexes specifically conceived to take into account problems arising when groups of exact equals are substituted by groups of close equals. Close equals groups are generally obtained by splitting the pre-tax income distribution into contiguous intervals having the same bandwidth, so that the problem of the bandwidth choice arises. van de Van, Creedy and Lambert (2001) suggest choosing the bandwidth that maximizes the potential vertical effect V. Even looking for V maximization, we discuss a new criterion that yields a compromise between the contrasting needs of minimizing the effects of pre-tax within groups inequalities and the minimization of group average re-rankings. The criterion is then applied to evaluate the components of two decompositions: the former is the one suggested by Urban and Lambert (2005, 2008) as preferable, the latter is suggested by us on the basis of Urban and Lambert’s paving discussion. According to our simulation results, when comparing different income tax systems for a same population as well as adopting the “optimal” bandwidth, the new criterion seems to introduce lower approximation errors than the maximization of V.

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File URL: http://web.econ.unito.it/prato/papers/n16.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Former Department of Economics and Public Finance "G. Prato", University of Torino in its series Working papers with number 16.

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Length: 24 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:tur:wpaper:16

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Keywords: Income Tax; Redistributive Effect; Horizontal Inequity; Re-ranking;

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Cited by:
  1. Giampaolo Arachi & Valeria Bucci & Ernesto Longobardi & Paolo M. Panteghini & Maria Laura Parisi & Simone Pellegrino & Alberto Zanardi, 2012. "Fiscal Reforms during Fiscal Consolidation: The Case of Italy," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(4), pages 445-465, December.

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