Redistributive effects in a dual income tax system

Working Paper 2010-187

Abstract

Equity issues of the dual income tax have been left aside in the field of economics. Since a dual income tax needs different modelling than a comprehensive one this paper offers firstly a quantitative framework to measure redistributive effects; it turns out that this involves both direct and indirect effects. The effects of horizontal inequity and re-ranking are also incorporated into the decomposition analysis. The approach is applicable using available income and tax statistics. Secondly, partial effects of changes in tax parameters are presented; they are channelled through the direct and indirect effects; and are not always straightforward.

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