Horizontal inequity under a dual income tax system: principles and measurement

Abstract

Abstract:Tax systems with separate taxation of wage and capital income, also called dual income tax systems, have gained relevance through the Mirrlees Review. Obviously, such tax systems are exposed to horizontal equity (HE) failures, or horizontal inequity (HI). HE and HI have a firm grip on assessment of fair tax policies, both from an academic point of view and in general public debate. The dual income tax system of Norway was modified by the tax reform of 2006 precisely because the previous schedule failed to deliver equal tax treatment of equals. This paper discusses the meaning and measurement of HI effects of dual income tax systems, and evaluates the development of HI for Norway over the time period 2000-2008 using micro data. A copula-based identification strategy efficiently establishes a framework for evaluations of HI over time. The dual income tax system and the early announcement of its impending revision during the period under examination created measurement problems which we had to account for by defining a new income concept for the empirical strategy. As expected, we find less HI in Norway after the reform of 2006. Keywords: Dual income tax, Horizontal inequity, Reranking, Copula estimation JEL classification: D31, D63, H31Acknowledgements: This work is part of the evaluation of the Norwegian tax reform of 2006, initiated and sponsored by the Norwegian Ministry of Finance. We thank Erik Fjaerli and Elin Halvorsen for their help establishing the data set that is used in this study. We thank Erling Holmøy for comments to an earlier version of the paper.

Measuring dependence between dimensions of poverty in Spain: An approach based on copulas

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Structural progression measures for dual income tax systems

“…The tax schedule displays enhanced residual progression at x if RP(x) decreases. 4 We now consider structural progression for a DIT. The first complication is that there are two income components.…”

“…To begin with, we shall make the assumption that a small change dx = dx L + dx D in the total income of a person with income components (x L , x D ) is shared in the proportions θ : 1 − θ between sources, i.e. that dx L = θdx and dx D = (1 − θ)dx (below, we will make other assumptions and also look at empirical evidence on income 4 Our expressions in Eqs. (2)-(4) are for an income unit experiencing a positive tax liability; see Keen et al [18] for the appropriate expressions when the tax function t (x) is non-differentiable, e.g.…”

“…Note that for a proportional tax, average rate progression is zero, and liability and residual progression are both unity, at all income values. 5 For the latter, see Bø et al [4] in respect of Norway. composition in the Nordic countries).…”

The Inequality Effects of a Dual Income Tax System

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