Normative Measures of Tax Progressivity: an International Comparison
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Normative Measures of Tax Progressivity: an International Comparison Nanak Kakwani 1,2 & Hyun Hwa Son 3 Received: 20 November 2019 / Accepted: 25 August 2020/ # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract
The relevance of tax progressivity measures to policymaking depends on whether they help assess the extent to which taxation leads to social welfare gains or losses. The social welfare implications of progressivity measures have yet to be explored adequately in the literature. This paper helps to fill this gap by proposing a social welfare function framework to derive measures of tax progressivity and explore their normative properties. Using the social welfare framework, the paper derives the Kakwani index from Sen’s social welfare function as well as a new class of progressivity measures that incorporate a distributional judgment parameter capturing inequality aversion. The paper also discusses the social welfare implications of the Suits measure of tax progressivity and develops a new measure of tax progressivity derived from the Bonferroni social welfare function. The paper derives both relative and absolute measures of tax progressivity from the social welfare function framework. The methodology developed in the paper is applied to make international comparisons of tax progressivity in 32 developed countries. The paper calculates the magnitude of welfare gains and losses due to taxation and the required social rates of return of public investments for governments to break even. This paper finds that the governments in some countries have to generate high social rates of return from their public investments to compensate for losses of social welfare from taxation. It concludes that optimizing social welfare requires designing a progressive tax system, minimizing the administrative costs of collecting taxes, and maximizing the social rates of return by efficiently investing tax revenues. Keywords Social welfare function . Tax progressivity . Redistribution . Normative analysis . Horizontal inequity JEL Classification H23 . H24 . H31 . H53 . I38
* Nanak Kakwani [email protected] Extended author information available on the last page of the article
N. Kakwani, H. H. Son
1 Introduction Designing a proper taxation system exemplifies the trade-off between efficiency and equity, which are the two fundamental principles of economic analysis. Efficiency deals with the presence of distortion in the economic behavior of agents, while equity is concerned with distributive justice (Duclos et al. 2003). The optimal taxation literature deals with both equity and efficiency issues, mainly with determining the optimal tax structure associated with the maximum social welfare. There is now a sizable literature on optimal taxation, which illuminates the basic structure of the problem and clarifies several issues in relation to the trade-offs between efficiency and equity.1 However, as Atkinson (1973) pointed out, the literature has not provided definite answers as to how progressive a tax
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