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Measuring the Distributional Impact of Taxation and Public Spending: The Practice of Fiscal Incidence Analysis

Author

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  • Nora Lustig

    (Stone Center for Latin American Studies, Department of Economics, Tulane University, Commitment to Equity Institute (CEQI))

Abstract

Taxation and public spending are key policy levers the state has in its power to change the distribution of income. One of the most commonly used methods to measure the distributional impact of a country’s taxes and public spending is fiscal incidence analysis. Rooted in the field of Public Finance, fiscal incidence analysis is the method utilized to allocate taxes and public spending to households so that one can compare incomes before taxes and transfers with incomes after them. Standard fiscal incidence analysis just looks at what is paid and what is received without assessing the behavioral responses that taxes and public spending may trigger on individuals or households. This is often referred to as the “accounting approach.” Although the theory is quite straightforward, its application can be fraught with complications. The salient ones are discussed here. While ignoring behavioral responses and general equilibrium effects is a limitation of the accounting approach, the effects calculated with this method are considered a reasonable approximation of the short-run welfare impact. Fiscal incidence analysis, however, can be designed to include behavioral responses as well as general equilibrium and inter-temporal effects. This article focuses on the implementation of fiscal incidence analysis using the accounting approach.

Suggested Citation

  • Nora Lustig, 2019. "Measuring the Distributional Impact of Taxation and Public Spending: The Practice of Fiscal Incidence Analysis," Commitment to Equity (CEQ) Working Paper Series 24, Tulane University, Department of Economics.
  • Handle: RePEc:tul:ceqwps:24
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    File URL: http://repec.tulane.edu/RePEc/ceq/ceq24.pdf
    File Function: First version, 2019
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    More about this item

    Keywords

    Fiscal incidence; taxation; social spending; transfers; pensions; progressivity; distributional effects; inequality; poverty; marginal contribution; effectiveness; valuing in-kind transfers.;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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