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




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.

Suggested Citation

  • Karl Ove Aarbu & Thor Olav Thoresen, 1997. "The Norwegian Tax Reform; Distributional Effects and the High-income Response," Discussion Papers 207, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:207

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    References listed on IDEAS

    1. Hans-Werner Sinn, 1991. "Taxation and the Cost of Capital: The "Old" View, the "New" View, and Another View," NBER Chapters,in: Tax Policy and the Economy, Volume 5, pages 25-54 National Bureau of Economic Research, Inc.
    2. 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.
    3. King, Mervyn A., 1983. "Welfare analysis of tax reforms using household data," Journal of Public Economics, Elsevier, vol. 21(2), pages 183-214, July.
    4. Shorrocks, Anthony F, 1983. "Ranking Income Distributions," Economica, London School of Economics and Political Science, vol. 50(197), pages 3-17, February.
    5. repec:hoo:wpaper:e-90-11 is not listed on IDEAS
    6. 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.
    7. 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.
    8. Thor Olav Thoresen, 1995. "The Distributional Impact of the Norwegian Tax Reform Measured by Disproportionality," Discussion Papers 146, Statistics Norway, Research Department.
    9. Martin Feldstein & James M. Poterba, 1996. "Empirical Foundations of Household Taxation," NBER Books, National Bureau of Economic Research, Inc, number feld96-1, January.
    10. 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.
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    Cited by:

    1. Thor O. Thoresen, 2004. "Reduced Tax Progressivity in Norway in the Nineties: The Effect from Tax Changes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(4), pages 487-506, August.
    2. Bergh, Andreas, 2006. "Explaining Welfare State Survival: The Role of Economic Freedom and Globalization," Ratio Working Papers 101, The Ratio Institute.
    3. Aarbu, Karl O. & Thoresen, Thor O., 2001. "Income Responses to Tax Changes--Evidence From the Norwegian Tax Reform," National Tax Journal, National Tax Association, vol. 54(2), pages 319-338, June.
    4. 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.
    5. Ingvild Almås & Tarjei Havnes & Magne Mogstad, 2011. "Baby booming inequality? Demographic change and earnings inequality in Norway, 1967–2000," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 9(4), pages 629-650, December.

    More about this item


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

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household


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