Front Matter

Copyright Page

© 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

Measuring the Redistributive Capacity of Tax Policies
Author: Charles Vellutini and Juan Carlos Benitez