IMPACT OF TAXES AND TRANSFERS

Enami, Lustig, Aranda, No. 25, November 2016
Before continuing, it should be noted that there are three instances in which the word
“marginal” is used in incidence analysis. 39
1. The marginal contribution or effect of a fiscal intervention (or of a change in a particular
intervention); this is the subject of this section of the paper. It is calculated as the difference
between the indicator of choice (for example, the Gini) without the intervention of interest (or
the change in the intervention of interest) and with the intervention. So, for example, if we are
interested in the marginal contribution of direct taxes when going from market income to
disposable income, we take the difference of, for example, the Gini without direct taxes and
the Gini of disposable income (which includes the effect of direct taxes).
2. The derivative of the marginal contribution with respect to progressivity or size of the intervention.
This is, so to speak, the marginal effect of progressivity or size on the marginal contribution.
In the case of the derivative with respect to the relative size, this is also known as the marginal
incidence for the intensive margin.
Both definitions one and two assume that the behavior of individuals is unchanged and
unaffected by changes in the taxes or transfers.
3. The extensive margin is the last instance for the application of the phrase “margin.” To
calculate the extensive margin, one needs to estimate the predicted expansion in, for example,
users of a service or beneficiaries of a cash transfer or payers of a tax, when the size of the
intervention is increased. Researchers have followed different approaches in calculating this
type of marginal effect. One way to estimate the effect of an expansion on the extensive
margin is by comparing results of average incidence analyses over time. For example, in
Mexico Lopez-Calva and others found that concentration curves for tertiary education moved
conspicuously towards the diagonal from 1992 to 2010, that is, the extensive margin was
progressive. 40 Because of identification problems, care must be taken not to ascribe a causal
effect from the expansion of tertiary education to the fact that the extensive margin is
progressive. However, one can argue that more spending has probably had something to do
with the progressive extensive margin.
As shown by Lambert, 41 the general condition for the tax to be equalizing (when it is added to
a system with a benefit in place) is derived from the following inequality:
(26) П N RS > ρ B
RS
39 For an extensive review of the literature on analyzing the concept of tax incidence, see Fullerton and Metcalf
(2002).
40 Lopez-Calva and others (forthcoming).
41 Lambert (2001, p. 278).
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