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Income distribution effects of the Swedish 1991 tax reform: An analysis of a microsimulation using generalized Kakwani decomposition

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  • Palme, Marten

Abstract

In 1991 a major tax reform was implemented in Sweden. This study compares the income equalization (income redistribution), vertical and horizontal equity properties of the pre- and post-reform tax and transfer systems. The method used is a decomposition, first proposed by Kakwani (1984), of the difference between the generalized Gini coefficients of the pre- and post-tax/transfer income districutions. The post-reform income distribution was obtained through a microsimulation carried out by the Ministry of Finance. Several findings emerge from the study. (i) The distribution of original incomes is unambiguously more equal under the post-reform regime. (ii) The increased amounts of child and housing allowances have a considerable equalizing effect. (iii) The pre-reform tax system has a larger vertical redistributive (equalizing) component. The decreased progressivity is the most important explanation in the lower end of the distribution, while the decreased tax rate explains more of the difference in the upper end. (iv) The reform increased horizontal equity. (v) It is a value judgement which of the distributions of disposable income are the most equal. The first four of these main findings apply when the calculations were redone within each separate household group. The overall methodological conclusion is that much more information was gained when different generalizations of the decomposition were considered.
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  • Palme, Marten, 1996. "Income distribution effects of the Swedish 1991 tax reform: An analysis of a microsimulation using generalized Kakwani decomposition," Journal of Policy Modeling, Elsevier, vol. 18(4), pages 419-443, August.
    • Handle: RePEc:eee:jpolmo:v:18:y:1996:i:4:p:419-443
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    2. Koen Caminada & Chen Wang, 2011. "Disentangling Income Inequality and the Redistributive Effect of Social Transfers and Taxes in 36 LIS Countries," LIS Working papers 567, LIS Cross-National Data Center in Luxembourg.
    3. Chen Wang & Kees Goudswaard & Koen Caminada, 2012. "Disentangling Income Inequality and the Redistributive Effect of Taxes and Transfers in 20 LIS Countries Over Time Evidence from the LIS Data," LIS Working papers 581, LIS Cross-National Data Center in Luxembourg.
    4. Nicolas Herault & Stephen P. Jenkins, 2021. "Redistributive effect and the progressivity of taxes and benefits: evidence for the UK, 1977–2018," Working Papers 592, ECINEQ, Society for the Study of Economic Inequality.
    5. O'Donoghue, Cathal & Mantovani, Daniela & Baldini, Massimo, 2004. "Modelling the redistributive impact of indirect taxes in Europe: an application of EUROMOD," EUROMOD Working Papers EM7/01, EUROMOD at the Institute for Social and Economic Research.
    6. Hérault, Nicolas & Jenkins, Stephen P., 2021. "Redistributive effect and the progressivity of taxes and benefits: evidence for the UK, 1977–2018," LSE Research Online Documents on Economics 112679, London School of Economics and Political Science, LSE Library.
    7. Mollaesmaeili Dehshiri, Hassan & Pajouyan, Jamshid & Hosseini, Shamseddin & Ghaffari, Farhad, 2020. "Analyzing the Impact of Fiscal Policy (Income Tax) on Income Distribution in Iran by Autoregressive Distributed Lag (ARDL) Approach," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 15(2), pages 221-234, April.
    8. Heikki Hiilamo, 2002. "Family Policy Changes at the Micro-Level in Sweden and Finland during the 1990s," LIS Working papers 291, LIS Cross-National Data Center in Luxembourg.
    9. Duncan, Denvil, 2014. "Behavioral responses and the distributional effects of the Russian ‘flat’ tax," Journal of Policy Modeling, Elsevier, vol. 36(2), pages 226-240.
    10. Caminada, Koen & Goudswaard, Kees & Wang, Chen, 2012. "Disentangling income inequality and the redistributive effect of taxes and transfers in 20 LIS countries over time," MPRA Paper 42350, University Library of Munich, Germany.
    11. DUCLOS, Jean-Yves, 1995. "Relative Performance, Relative Deprivation and Generalised Gini Indices of Inequality and Horizontal Inequity," Cahiers de recherche 9514, Université Laval - Département d'économique.
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    13. Vanesa Jorda & Jose M. Alonso, 2020. "What works to mitigate and reduce relative (and absolute) inequality?: A systematic review," WIDER Working Paper Series wp-2020-152, World Institute for Development Economic Research (UNU-WIDER).

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    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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