Income Distribution Effects of the Swedish 1991 Tax Reform: An Analysis of a Microsimulation Using Generalized Kakwani Decomposition

In 1991 a major tax reform was implemented in Sweden. This study compares the income equalization (income redistribution), vertical and horizontal equity properties of the pre- and post-reform tax and transfer systems. The method used is a decomposition, first proposed by Kakwani (1984), of the difference between the generalized Gini coefficients of the pre- and post-tax/transfer income districutions. The post-reform income distribution was obtained through a microsimulation carried out by the Ministry of Finance. Several findings emerge from the study. (i) The distribution of original incomes is unambiguously more equal under the post-reform regime. (ii) The increased amounts of child and housing allowances have a considerable equalizing effect. (iii) The pre-reform tax system has a larger vertical redistributive (equalizing) component. The decreased progressivity is the most important explanation in the lower end of the distribution, while the decreased tax rate explains more of the difference in the upper end. (iv) The reform increased horizontal equity. (v) It is a value judgement which of the distributions of disposable income are the most equal. The first four of these main findings apply when the calculations were redone within each separate household group. The overall methodological conclusion is that much more information was gained when different generalizations of the decomposition were considered.