Evaluating the Income Tax Redistributive Impact: A More Comprehensive Approach

Abstract

In order to investigate the redistributional effects induced by personal income tax, empirical researchers are used to fixing a common distribution of income before tax for all tax schedules being compared. On one hand, this approach allows us to isolate the effect of tax policies. On the other hand, if the goal is to assess the real impact rather than the potential inequality outcomes of various tax regimes, it is well known that the income tax redistributive effect is mainly determined by both the pre-tax income distribution and the tax schedule operating on this distribution.

In order to analyse tax reforms which will act on unknown pre-tax income distributions, this paper presents a simple procedure useful for practitioners wishing to take into account pre-tax distributional differences before undertaking comparisons between tax schedules. This new procedure is illustrated for a more accurate evaluation of the PIT reforms recently implemented in Italy. Finally, the outcomes of traditional analyses and our approach are compared.

Keywords: personal income taxation, redistribution, welfare

JEL Classification: H23, H24, D63