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

progrespretaxvar posttaxvar[weight] [ifexp] [inrange] [,param(real 2.0)format(%fmt)]

aweightsandfweightsare allowed; see help weights.

Description

progresis a module for assessing the distributive effects of an income tax.progrestakes 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.

pretaxvaris pre-tax income (X) andposttaxvaris post-tax income (Y). Tax payments (T) are determined from the difference betweenpretaxvarandposttaxvar. Measures computed byprogresare:- 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.

pretaxvaris required to be non-negative. Observations withpretaxvar<0 are automatically discarded in computations.

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 resultsAll 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)

ReferencesAtkinson, 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.

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

Philippe Van Kerm CEPS/INSTEAD Luxembourg philippe.vankerm@ceps.lu

Useful comments and testing by Christoph Haas are gratefully acknowledged.