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Comparative Analysis of the Effective Income Tax Function: Empirical Evidence using LIS Data

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  • Jin Kwon Hyun
  • Byung Lim

Abstract

The effective income tax function is useful and practical methodology to analyze the relationship between income and tax amounts. It includes the measures of tax progressivity, the maximum effective tax rate, and horizontal inequity. We statistically estimated the effective income tax function using the seven countries out of LIS datasets and Korean data. We also estimated the R-S index and the Kakwani index so as to test the consistency among these indexes. Our empirical results give us several implications. Four different indexes of tax progressivity reflect different aspects about the progressivity, implying that it requires policy planners to evaluate the income tax system with alternatives. The estimated maximum effective tax rate is usually less than or very close to its maximum statutory marginal tax rate, except for Norway and Korea. It implies that the estimation of the effective tax function is of great use and significance to evaluate the characteristics of the income tax law. The mean squared error from the effective income tax function can be used to represent the degree of the horizontal inequity as a quick measure.

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  • Jin Kwon Hyun & Byung Lim, 2004. "Comparative Analysis of the Effective Income Tax Function: Empirical Evidence using LIS Data," LIS Working papers 369, LIS Cross-National Data Center in Luxembourg.
    • Handle: RePEc:lis:liswps:369
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