Income redistribution through taxation – how deductions undermine the effect of taxes

Oliver Hümbelin () and Rudolf Farys ()
Additional contact information
Oliver Hümbelin: Bern University of Applied Sciences
Rudolf Farys: University of Bern

Journal of Income Distribution, 2017, vol. 25, issue 1, 1-35

Abstract: This paper shows the potential of administrative data to grant us a more complete picture of the redistributive effects of the visible (tax rates) and hidden (tax deductions) instruments of the fiscal welfare state. Based on administrative tax data from a large Swiss canton, we apply a gini-based redistributive effect decomposition to demonstrate how several taxes and deductions impact the post-tax income distribution. We show that tax deductions drastically reduce the redistributive effect of taxes because lump sum deductions in a progressive tax system lead to greater tax relief for higher income earners. Moreover, high income earners have additional options to claim deductions such as real-estate expenses or extra-mandatory payments to the pension scheme. Comparison over time furthermore shows that the role of deductions for real-estate expenses decreased. All in all, because deductions reduce the redistributive effect of taxes, they lead to higher post tax income inequality compared to a hypothetical system without deducations. The redistrubtive effect of the tax system should therefore be studied, not only with respect to tax rates, but also with respect to deductions.

Keywords: Redistribution effects; tax deductions; direct taxes; tax competition; Switzerland (search for similar items in EconPapers)
JEL-codes: D31 D6 H23 H24 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.glendon.yorku.ca/repec/uploads/repec/jid/articles/40330.pdf (application/pdf)
Some fulltext downloads are only available to subscribers. See JID website for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:jid:journl:y:2017:v:25:i:1:p:1-35

Access Statistics for this article

More articles in Journal of Income Distribution from Ad libros publications inc. Contact information at EDIRC.
Bibliographic data for series maintained by Timm Boenke ( this e-mail address is bad, please contact ).