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© 2021 International Monetary Fund
WP/21/252
IMF Working Paper
Fiscal Affairs Department
Measuring the Redistributive Capacity of Tax Policies
Prepared by Charles Vellutini and Juan Carlos Benitez1
Authorized for distribution by Alexander Klemm
October 2021
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
This paper presents a novel technique to measure and compare the redistributive capacity of observed tax (or transfer) policies. The technique is based on income distribution simulations and controls for differences in pre-tax income distributions. It assumes that the only information on the pre-tax distribution available in each country-year is the Gini coefficient and the mean (GDP per capita). We illustrate the technique with an application to the personal income tax, using a dataset of 108 countries over the 2007–2018 period.
JEL Classification Numbers: D31,C63, H23, H24
Keywords: Income distribution, redistribution, progressivity, personal income tax Author’s E-Mail Address: cvellutini@imf.org; ibenitez@imf.org
Contents
ABSTRACT
I. INTRODUCTION
II. MEASURING THE REDISTRIBUTE EFFECT OF TAX POLICY
A. Progressivity and Redistribution Indices
B. Correcting for Differences in Pre-Tax Distributions
III. A SIMPLIFIED IMPLEMENTATION OF THE TRANSPLANT-AND-COMPARE METHOD.
A. The Transplant-and-Compare Mechanics
B. Using Parametric Distributions of Pre-Tax Income
C. A Simplified Step-by-Step Recapitulation
IV. AN APPLICATION: REDISTRIBUTE CAPACITY OF THE PIT AROUND THE WORLD
A. Objective and Caveats
B. Data
C. Results
V. CONCLUSIONS
REFERENCES
FIGURES
1. Taxation of Capital Gains
2. Special Tax Regimes for Unincorporated Business Income
3. Distribution of Market Income Gini Coefficients
4. Features of the PIT
5. PIT Transplant-and-Compare Indices, Simplified vs Microdata
6. PIT Redistributive Capacity as a Function of Progressive Capacity and the Aggregate Tax Rate
7. Average PIT Progressive and Redistributive Capacities by Country Group
8. Average Progressive and Redistributive Capacities in the OECD
TABLES
1. Structure of the Dataset by Country Group
2. PIT Redistribution and Pre-tax income Inequality
APPENDICES
I. The Kakwani Decomposition
II. Progressive and Redistributive Capacities of the PIT