Horizontal Inequity and Vertical Redistribution

Abstract

Inequality of post-tax income among pre-tax equals is evaluated and aggregated to form a global index of horizontal inequity in the income tax. The vertical action of the tax is captured by its inequality effect on average between groups of pre-tax equals. Putting the two together, horizontal inequity measures loss of vertical performance. The identification problem, which has previously been thought insuperable, is addressed by a procedure validating the banding of income units into "close equals" groups. The horizontal and vertical effects of a major Spanish income tax reform are evaluated. Lines for future investigation are suggested.

JEL Classification: D63