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The Redistributive Effect of Taxation Revisited


  • Creedy, J.
  • Lambert, P.J.
  • Van de Ven, J.


This paper suggest that the decomposition of the redistributive effect of taxation into vertical, horizontal, and re-ranking components is best achieved in terms of the welfare premium from progression, using hte abbreviated social welfare function defined in terms of the Gini measure of inequality. This contrasts with the decomposition given in Aronson et al. (1994) in which the estimate of the horizontal effect is shown here to be contaminated. Estimation of the horizontal effect for small sample populations is achieved by using near-equals to proxy exact-equals, where groups of near-equals are defined using a band-width of pre-tax incomes, following Aronson et al. (1994). It is shown that the horizontal effect is best estimated by selecting a band-width to maximise the estimated vertical effect. The estimate of the horizontal effect is then obtained by subtraction, having computed the re-ranking component exactly as a sample statistic.

Suggested Citation

  • Creedy, J. & Lambert, P.J. & Van de Ven, J., 1998. "The Redistributive Effect of Taxation Revisited," Department of Economics - Working Papers Series 657, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:657

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    References listed on IDEAS

    1. Hensher, David A, 1986. "Sequential and Full Information Maximum Likelihood Estimation of a Nested Logit Model," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 657-667, November.
    2. Saul D. Hoffman & Greg J. Duncan, 1988. "A Comparison of Choice-Based Multinomial and Nested Logit Models: The Family Structure and Welfare Use Decisions of Divorced or Separated Women," Journal of Human Resources, University of Wisconsin Press, vol. 23(4), pages 550-562.
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    Cited by:

    1. Georgia Kaplanoglou & David M. Newbery, 2008. "Horizontal Inequity and Vertical Redistribution with Indirect Taxes: The Greek Case," Fiscal Studies, Institute for Fiscal Studies, vol. 29(2), pages 257-284, June.

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    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy


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