IMPACT OF TAXES AND TRANSFERS
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ANALYTIC FOUNDATIONS: MEASURING<br />
THE REDISTRIBUTIVE <strong>IMPACT</strong> <strong>OF</strong> <strong>TAXES</strong><br />
<strong>AND</strong> <strong>TRANSFERS</strong> <br />
Ali Enami, Nora Lustig, Rodrigo Aranda <br />
CEQ Working Paper No. 25<br />
NOVEMBER 2016<br />
ABSTRACT<br />
This paper provides a theoretical foundation for analyzing the redistributive effect of taxes and<br />
transfers for the case in which the ranking of individuals by pre-fiscal income remains unchanged. We<br />
show that in a world with more than a single fiscal instrument, the simple rule that progressive taxes or<br />
transfers are always equalizing not necessarily holds, and offer alternative rules that survive a theoretical<br />
scrutiny. In particular, we show that the sign of the marginal contribution unambiguously predicts<br />
whether a tax or a transfer is equalizing or not.<br />
JEL classification: H22, D31, A23<br />
Keywords: Marginal contribution, progressivity, inequality, fiscal<br />
system with multiple taxes and transfers.<br />
This paper is a chapter in Nora Lustig (editor), Commitment to Equity Handbook. A Guide to Estimating the Impact of<br />
Fiscal Policy on Inequality and Poverty. Brookings Institution Press and CEQ Institute. The online version of the<br />
Handbook can be found here (copy the following URL<br />
link): http://www.commitmentoequity.org/publications/handbook.php. Launched in 2008, the CEQ project is<br />
an initiative of the Center for Inter-American Policy and Research (CIPR) and the department of Economics,<br />
Tulane University, the Center for Global Development and the Inter-American Dialogue. The CEQ<br />
project is housed in the Commitment to Equity Institute at Tulane. For more details visit<br />
www.commitmentoequity.org.<br />
Ali Enami and Rodrigo Aranda are doctoral students of the PhD in Economics at Tulane University and<br />
Research Associates of the CEQ Institute. Nora Lustig is the Director of the CEQ Institute at Tulane University.<br />
For questions, please contact aenami@tulane.edu.