Progressive Taxation and Redistributive Taxation: Different Labels for the Same Product?

Abstract

The paper examines different approaches to measure tax progressivity. In particular the distributional aspect of taxation is considered in some depth. For each member of a parametric class of inequality concepts, including more than only the relative and the absolute view of inequality, a necessary and sufficient condition for a tax function to be inequality reducing with respect to this concept for all admissible pre-tax income distributions is derived, both in strong and weak form. Only three very natural properties are required to prove this result: each tax liability is less than the corresponding pre-tax income, taxation does not reverse ranks on the income scale, and inequality is reduced if a rich gives to a poor such that they do not interchange their ranks. A definition of tax progressivity based on the shown equivalence is suggested. It is demonstrated that inequality reducing taxation is equivalent to progressive taxation in the sense of an increasing average tax rate if and only if the concept of relative inequality is used.

An early version of this paper was presented at the seminar on “Distributive Justice and Inequality” at the Wissenschaftskolleg, Berlin, May 20–24, 1986. Some of the material contained previously circulated under the heading “Generalized concepts of tax progression and inequality reduction”

The author is indebted to Peter Lambert whose survey of tax progressivity inspired the present analysis incredibly. James Foster, John Weymark, and two anonymous referees provided helpful comments. Remaining errors and omissions are all mine.