Redistribution, horizontal inequity, and reranking

Working Paper 2023-660

Abstract

We decompose the redistributive effect of direct taxes into vertical, horizontal, and reranking components applying the methods of Urban and Lambert (Public Finance Review, 2008). Inthe first such application to the UK, and using yearly data covering 1977–2020, we find thatredistributive effect increased over the period. However, there is no clear trend in horizontalinequity and this component forms a very small fraction of total redistributive effect bycomparison with reranking and especially vertical components. It is also the verticalcomponent that best tracks trends in redistributive effect. We give specific attention to thechoice of the bandwidth used to define ‘close equals’ in terms of pre-tax income. We alsoshow that implausible estimates of the horizontal inequity component arise for some yearsregardless of bandwidth used.

Authors: Nicolas Hérault, Stephen P. Jenkins.

Keywords: Redistributive effect, redistribution, horizontal inequity, reranking, Urban-Lambert decomposition, income tax
JEL: D31, H24, H50, I38