Discussion Paper

No. 2019-26 | March 22, 2019
Shifting tax burden to top income earners: what is the best way to reduce inequality?

Abstract

The authors analyze to what extent and how the tax burden should be shifted towards top income earners in order to reduce income inequality. Starting from Lambert and Aronson (Inequality decomposition analysis and the Gini coefficient revisited 1993) and Alvaredo (A note on the relationship between top income shares and the Gini coefficient 2011) decomposition by income groups, they prove that for three types of revenue-neutral linear personal income tax reforms based on Pfähler (1984) the redistributive effect is always higher than before the reform; and when the size of the rich group is sufficiently small (e.g. 1%), the best option is allocating tax changes proportionally to net income, and the worst doing it proportionally to tax liabilities. An empirical illustration of the theoretical results is provided using micro data from the Spanish PIT.

JEL Classification:

D31, D33, D63, H23, H24

Assessment

  • Downloads: 377

Links

Cite As

Jorge Onrubia, Fidel Picos, and María del Carmen Rodado (2019). Shifting tax burden to top income earners: what is the best way to reduce inequality? Economics Discussion Papers, No 2019-26, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-26


Comments and Questions


Carmen Díaz-Roldán - suggestion
May 08, 2019 - 11:58

The paper deals with a very pertinent topic, it has been elaborated with propriety and the results are relevant. However, the conclusions presented are too descriptive. A discussion about the implications of economic policy is missed. And should be also discussed the attitude of the fiscal authorities, which may show ...[more]

... different preferences from those of society. In this sense, the results obtained could vary taking in account the possibility of opting for efficiency, equity or redistribution.


Jorge Onrubia - Reply to suggestions
July 31, 2019 - 01:17

Dear Carmen,

First of all, we would like to thank you for your commentaries about our discussion paper.
Certainly, we agree that in this type of tax reforms, the political economy implications are very relevant, given the important trade-off between redistribution and efficiency that presumably underlies the decisions ...[more]

... of the top income taxpayers. Therefore, in the revised version, we have included in the last section a mention of this issue, referring to a future investigation, since its study is outside the main content of this article.


Anonymous - Suggestion
May 10, 2019 - 18:55

The article analyses a very hot topic in the literature, the relationship between taxation of top income earners and inequality. This paper follows concerns arisen by Picketty and Saez from an innovative perspective. In addition, authors provide a clear theoretical contribution backed by a strong methodological framework.
Finally, I ...[more]

... would suggest to include a new table containing the nine reform scenarios (as the result of possible combinations) in order to make it easier to understand for the reader.


Anonymous - Reply to suggestion
July 31, 2019 - 01:18

First of all, we would like to thank you for your commentaries about our discussion paper.

We do not understand well what Table is suggested. If you are referring to the combination of the three types of linear reforms (a: proportional to tax liability, b: proportional to the ...[more]

... net income; or c: proportional to the taxable income), we believe that the presentation of the alternatives made in subsection 2.2 it is clear enough. In addition, only the decrease-increase combinations (or vice versa) that use the same type of linear reform (aa, bb, cc, or aa', bb', cc') are those analyzed.


Rafael Granell - Suggestion
May 14, 2019 - 09:03

This paper is an interesting contribution about redistributive assessment of Personal Income Tax reforms. It introduces a new methodological approach to sort different types of reforms in terms of progressivity and distributional effect.

The empirical illustration using the Spanish PIT is very useful to understand the different parts of ...[more]

... the redistributive effect (between, within and interaction) but, in my opinion, the stylized PIT is too complex to assess redistributive effects. It has a progressive schedule, a regressive deduction and a progressive tax credit. From my point of view it would be easier to take into account an exponential progressive function to calculate the tax liability without deductions and tax credits, maintaining the same Gini indexes than in the original survey (if it is possible). The survey has an additional problem: it has individual and joint filings that are not completely comparable in distributional terms. It would be better to simulate only one type of filings (individual ones).


Jorge Onrubia - Reply for suggestions
July 31, 2019 - 01:18

Dear Rafael,


Anonymous - Reply for suggestions
July 31, 2019 - 01:19

Dear Rafael,

First of all, we would like to thank you for your commentaries about our discussion paper.
As we have pointed out in the article, the purpose of empirical exercise is exclusively to illustrate the theoretical results by applying them to a tax structure with a progressive ...[more]

... distribution of tax liabilities similar to the 2011 Spanish personal income tax. From a theoretical point of view, the fulfillment of the theorems used in the analysis requires that the tax labilities exclusively depend on gross income (but not on other non-income attributes). As we clarify on page 11, in order to stay as close as possible to the real tax, we simulate a stylized tax T=t(y) with the same revenue and redistribution effect as the real tax applied in 2011, such that T=t(y)=f(y-d(y))-c(y), where f(∙) represents the tax schedule, d(y) are tax deductions and c(y) tax credits.

The values estimated for the tax parameters reproduce the real variability originated by tax treatments based on non-income attributes, but maintaining the exclusive dependence on income. As you can see in Table 2, all the parameters only depend on total income or are constant. Therefore, the required condition is fulfilled. Thus, we think that the stylized tax is adequate to illustrate the theoretical analysis offered in the article.

Regarding the comment about the differentiation between individual and joint filings, we have to say that this is not relevant in the stylization that we have made, since all the returns are taxed on an individual basis, without taking into account the option offered by the real Spanish personal income tax in force in the year 2011.


Anonymous - My comments
May 16, 2019 - 11:04

This paper is clearly written and very well structured. It obtains clear propositions derived from different reforms in personal income tax. The paper takes different pieces of theory (Alvaredo decomposition of Gini’s index, Phäler alternatives for linear tax reforms) and combines them to produce new results. Undoubtedly it could be ...[more]

... an important guide for policy proposals. It demonstrates that only few combinations of shifting tax burden to top income earners produce unambiguous results.
My main concern is about the empirical illustration. The use of the ‘stylized tax’ erodes the main conclusions of the theoretical part of the paper, as the world represented is not real. The main problem to be studied would be equally illustrated if using a theoretical distribution of income and taxes. In fact, what is really done is to construct a new sample just using a function similar to 2011 tax schedule for general income.


Anonymous - Reply to suggestions
July 31, 2019 - 01:21

First of all, we would like to thank you for your commentaries about our discussion paper.

As we have explained in the answer to referee and other reader, the empirical exercise included in section 4 only aimed to illustrate the fulfillment of the proposed theoretical results, for a ...[more]

... similar tax structure in terms of progressivity and redistributive effect to the Spanish personal income tax.

As stated in the article, the empirical exercise is merely an illustration of the theoretical results obtained. The stylization of the Spanish personal income tax (IRPF) has been carried out due to the need to have a tax structure in which the tax liabilities depend solely on income. As explained in the paper, real-world personal income taxes include a set of non-income attributes (marital status, family charges for children, ascendants, age, disabilities, …, as well as a differentiation of tax treatments by source of income, as happens in dual taxes). Thus, the tax function does not depend solely on income, so the empirical contrast of theorems does not have to work. Against the alternative of creating a tax totally different from the one in force in Spain, we have opted for its stylization, maintaining its total revenue level (total effective average tax rate) and its redistributive effect, with the purpose of serving as a reference.


Anonymous - Referee Report 1
May 17, 2019 - 13:09

See attached file