IMPACT OF TAXES AND TRANSFERS

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Enami, Lustig, Aranda, No. 25, November 2016 We have developed table 4 assuming there is no reranking. If there is reranking, the link between the progressivity and size of a tax and its redistributive effect is no longer straightforward, and thus comparisons are no longer straightforward either. (The consequences of reranking in chapter 3 of the CEQ Handbook.) In addition, the three conditions in table 4 are equivalent under the assumption that the post-tax Lorenz curve under a specific tax dominates the post-tax Lorenz curve under another tax. We have left the discussion of the implications of no dominance for future work Note also that the conditions for comparing the redistributive effect between different taxes characterized by different degrees of progressivity and size were defined for the case in which the pre-tax income distribution is always the same. The comparison of the redistributive effect of taxes (and transfers) in cases when the original income distributions are not the same is left for future work. 14 More important, even without reranking, with dominance and keeping the original distribution constant, in the case of more than one intervention the neat relationship between the size and progressivity of a fiscal intervention and its redistributive effect no longer holds. As we will see in section 2 of this paper, a tax can be regressive using any of the necessary or sufficient conditions spelled out in table 2 and still exert an equalizing influence on the post-tax and transfer income distribution, by which we mean that, in the absence of such a tax, the reduction in inequality would be smaller than with the tax in place. Before we turn to this topic, however, we will present the analogous conditions for a single transfer. 1.2. A Single Transfer The word “single” here does not mean that the conditions derived in this section apply to a system with only one transfer. In the case of multiple transfers, however, they need to be aggregated into one category in order for the conditions to apply. Transfers here encompass a wide spectrum of benefits provided by the government such as cash transfers, school food programs, consumption subsidies, and access to free public services. We will use the words transfer and benefit interchangeably and use the abbreviation B for both. 14 Interested readers can refer to Dardanoni and Lambert (2000). 18
Enami, Lustig, Aranda, No. 25, November 2016 We will also use the following definitions: x = pre-tax income B(x) = transfer at income x x + B(x) = post-transfer income B(x) / x = b(x) = average benefit rate at income x b’(x) = marginal benefit rate B = total transfers = ∑ i=1 B(x i ) b = total transfers ratio = B / X => (1 + b) = (X + B) / X => b / (1 + b) = B / (X + B) L X (p), L X+B (p) = Lorenz curve of pre-transfer income and post-transfer income, respectively (ranked by original income) C X+B (p), C B (p) = Concentration curve of post-transfer income and transfer, respectively (ranked by original income) 19
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IMPACT OF TAXES AND TRANSFERS

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