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Distributive effects of an income tax -- Measures of progressivity, vertical eq
> uity and reranking

progres pretaxvar posttaxvar [weight] [if exp] [in range] [,
param(real 2.0) format(%fmt) ]

aweights and fweights are allowed; see help weights.

Description

progres is a module for assessing the distributive effects of an income
tax.  progres takes unit-record data on pre-tax and post-tax income and
computes several classic measures of (net) redistributive effects,
progressivity, vertical equity and reranking (horizontal inequity). All
indices are derived from (generalized) Gini coefficients of inequality
and (generalized) concentration coefficients.

pretaxvar is pre-tax income (X) and posttaxvar is post-tax income (Y).
Tax payments (T) are determined from the difference between pretaxvar and
posttaxvar.  Measures computed by progres are:

- The Kakwani (1977) index of tax progressivity: K = C(T) - G(X)

- The Musgrave-Thin (1948) index of redistributive effect: MT =
(1-G(Y))/(1-G(X))

- The Reynolds-Smolensky (1977) index of redistributive effect: RS =
G(X) - G(Y)

- The Vertical Equity measure: VE = G(X) - C(Y) = g/(1-g) * K , where g
is the average tax rate.

- The Reranking effect: R = VE - RS = G(Y) - C(Y)

- The Atkinson (1980)-Plotnick (1981) index of horizontal inequity:  AP
= 0.5 * R/G(Y)

- The Suits' (1977) index if progressivity: S = 1- L/K where K denotes
the area below the line of proportionality, and L denotes the area below
the Lorenz curve of tax payments against income.

pretaxvar is required to be non-negative. Observations with pretaxvar<0

Options

param(real 2.0) sets the generalized Gini inequality aversion
coefficient. Default is 2 leading to the classical Gini and
concentration coefficients.  Greater inequality aversion can be
adopted by setting param larger than 2.

format(%fmt) specifies the results display format. Default is %5.4f.

Saved results

All computed indices listed above are stored in real scalars:

r(Kakwani), r(MusThin), r(ReySmol),
r(VE), r(R), r(AP), r(AtkPlot), r(Suits).

Additionally, the average tax rate and the generalized Gini and
concentration coefficients of pre-tax income, post-tax income and tax
are stored in

r(ATR), r(G_pre), r(G_post), r(C_post), r(C_tax).

Furthermore, the (weighted) number of observations and the variables used
are stored in

r(N), r(sum_w), r(posttaxvar), r(pretaxvar).

Examples

. progres gross_inc std_dispy

. progres gross_inc std_dispy [aw=coweight] , param(3.0)

References

Atkinson, A. (1980), Horizontal Inequity and the Distribution of the Tax
Burden in H. Aaron & M. Boskin (eds.), The Economics of Taxation,
pp.3-18.

Kakwani, N.C. (1977). Measurement of Tax Progressivity: An International
Comparison, Economic Journal 87: 71-80.

Lambert, P. J. (2001): The distribution and redistribution of income,
Manchester University Press, 3rd edition.

Musgrave, R.A. and Thin, T. (1948). Income tax progression 1929-48, Journal
of Political Economy 56: 498-514.

Ochmann, R. and Peichl, A. (2006): Measuring Distributional Effects of
Fiscal Reforms, Finanzwissenschaftliche Diskussionsbeiträge 06-9, Köln.

Plotnick, R. (1981), A Measure of Horizontal Inequity in Review of Economics
and Statistics, vol.63, p.283-288.

Reynolds, M. and Smolensky, E. (1977). Public Expenditures, Taxes, and the
Distribution of Income: The United States, 1950, 1961, 1970, Academic
Press, New York.

Suits, D. (1977). Measurement of Tax Progressivity, American Economic Review
67: 747-752.

Authors

Andreas Peichl
Cologne Center for Public Economics
University of Cologne, Germany
a.peichl@uni-koeln.de
www.cpe-cologne.de

Philippe Van Kerm