IMPACT OF TAXES AND TRANSFERS

Enami, Lustig, Aranda, No. 25, November 2016
As shown in table 8, a system that combines a regressive tax with a regressive or neutral
transfer or a neutral tax with a regressive transfer can never be equalizing. A system that
combines a progressive tax with a neutral or progressive transfer or a neutral tax with a
progressive transfer is always equalizing. Combining a neutral tax and a neutral transfer leaves
inequality unchanged. A regressive tax combined with a progressive transfer or a progressive
tax combined with a regressive transfer can be equalizing if and only if Condition 16 holds.
Table 8. Net Fiscal System: Conditions for the One Tax-One Transfer Case
Transfer
Regressive
ρ K B < 0
Neutral
ρ K B = 0
Progressive
K > 0
ρ B
Regressive
П T K < 0
Always unequalizing
Always unequalizing
Equalizing if and
only if Condition 16
holds
Tax
Neutral
П T K = 0
Always unequalizing
No change in equality Always equalizing
Progressive
П T K > 0
Equalizing if an only
if Condition 16 holds
Always equalizing
Always equalizing
2.1.2. Conditions for the Multiple Taxes and Transfers Case
Let’s assume there are n taxes and m transfers in a fiscal system. Equation 12 can be written as
(19) П N RS = ∑ (1−g i )П T i
n
RS m
RS
i=1 +∑ j=1(1+b j )ρ Bj
1−∑n
i=1 g i +∑m
j=1 b j
The condition for the net system to be equalizing is that the Reynolds-Smolensky index for the
net fiscal system should be higher than zero, that is,
(20) П N RS > 0
that is,
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