Tax Progression in OECD Countries

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1 Tax Progression in OECD Countries

3 Christian Seidl Kirill Pogorelskiy Stefan Traub Tax Progression in OECD Countries An Integrative Analysis of Tax Schedules and Income Distributions 123

4 Christian Seidl Faculty of Economics and Social Sciences University of Kiel Kiel Germany Stefan Traub Zentrum für Sozialpolitik University of Bremen Bremen Germany Kirill Pogorelskiy Division of the Humanities and Social Sciences California Institute of Technology Pasadena California USA ISBN ISBN (ebook) DOI / Springer Heidelberg New York Dordrecht London Library of Congress Control Number: Springer-Verlag Berlin Heidelberg 2013 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer is part of Springer Science+Business Media (

5 To Christine, Jennie, and Sandra

7 Preface The conventional approaches to comparing tax progression (using local measures, global measures, or dominance relations for first-moment distribution functions) often lack applicability to the real world: local measures of tax progression ignore the income distribution entirely. Global measures are welfare indices that aggregate over the whole support of the respective income distribution. Thus, regions of higher tax progression are mixed with regions of lower tax progression, which may lead to ambiguous or counterintuitive results when comparing rather different income distributions and tax systems. Dominance relations of comparing tax progression depend heavily on the assumption that the same income distribution holds for all situations to be compared, which renders this approach inappropriate for international and intertemporal comparisons. Based on the earlier theoretical work of one of the authors, this study develops a unified methodology of comparing tax progression using dominance relations under different income distributions. We address it as uniform tax progression for different income distributions and present the respective approach for both continuous and discrete cases, where the latter is a precondition for empirical investigations. Using dominance relations, we define tax progression under different income distributions as a class of natural extensions of uniform tax progression in terms of taxes, net incomes, and differences of first-moment distribution functions. To cope with different monetary units and different supports of the income distributions involved, we utilize their transformations to population and income quantiles. Altogether, we apply six methods of comparing tax progression, which were adapted from dominance relations under the assumption of identical income distributions for the situations to be compared. Broadly speaking, they are related to tax elasticity and residual income elasticity. We also extend these measures by taking the difference of first-moment distribution functions of taxes (or net incomes) and of gross incomes. Three measures are defined in terms of taxes and three in terms of net incomes. We apply these measures to empirical analyses of comparisons of tax progression using data from the Luxembourg Income Study Database (LIS). This is the first study that performs international and intertemporal comparisons of uniform tax progression with actual micro data. For our analyses we chose those countries for which LIS disposes of the required data on gross incomes, taxes, payroll taxes, and net incomes. This pertains to 13 OECD countries, viz. Australia, Canada, Denmark, Finland, Germany, Israel, vii

8 viii Preface Netherlands, Norway, Sweden, Switzerland, Taiwan (gained observer status in the OECD in 2002), United Kingdom, and United States. This selection of countries enables us to perform 78 international comparisons, which we carry out for household data and equivalized data as well as for direct taxes and direct taxes inclusive of payroll taxes. In total we investigate 312 international comparisons for each of the six methods of comparing tax progression. In two-thirds of all cases of our qualitative analyses for international comparisons, we observe uniformly greater tax progression. In a bit more than one-fifth, we observed bifurcate tax progression, i.e., progression is higher for one country up to some population or income quantile threshold, beyond which the situation reverses, i.e., progression becomes higher for the second country. No clear-cut findings can be reported for just one-tenth of all cases. But even in these cases some curve differences are so small that they are negligible. For qualitative analyses of intertemporal comparisons of tax progression, we present the results for the United States, the United Kingdom, and Germany for several time periods. We align our findings with respect to major political eras in these countries, e.g., George H. W. Bush, William J. Clinton, and George W. Bush for the United States; Margaret H. Thatcher, John Major, and Anthony C. L. Blair for the United Kingdom; and for Germany the last year before German reunification (1989), the beginning of Helmut J. M. Kohl s last term as chancellor (1994), and Gerhard F. K. Schröder (2000). In addition, we perform robustness checks with respect to the equivalence scale parameter. Since the data of the Luxembourg Income Study are (representative) sample data, we also perform statistical tests of progression comparisons. The tests reveal even more dominance relations than we observe from our qualitative analyses. We combine the statistical and qualitative results for international and intertemporal comparisons to analyze tax progression in greater detail, driving quantitative judgments. In addition, we include a thorough and accurate description of the fiscal and social institutions in the surveyed countries. This information is indispensable for our integrative analyses. Given the depth and broadness of our analyses, it is our sincere hope that this book presents the most detailed account of international and intertemporal comparisons of tax progression and its structural components in OECD countries. Our results demonstrate the usefulness of the proposed method of uniform tax progression for different income distributions. Finally, we have the pleasure of expressing our gratitude and indebtedness to several people and institutions. Various discussion paper series were kind enough to disseminate preliminary versions of parts of this book. For helpful comments we are indebted to Fuad Aleskerov and the audience of his seminar at National Research University Higher School of Economics, Moscow Affiliation; to Vyacheslav Chistyakov of National Research University Higher School of Economics, Nizhny Novgorod Affiliation; to Nicolaos Papanicolaos of the University of Luxembourg; and to the participants of the 2010 Budapest Meeting of the Finanzwissenschaftlicher Ausschuss (whose as well as Dr. Papanicolaos queries led to our reasoning in Corollary 3, Footnote 34 in Chap. 4, and Sects and 4.4.3).

9 Preface ix Kirill Pogorelskiy gratefully acknowledges partial financial support from the Collaborative Research Center 597 Transformations of the State (University of Bremen), Decision Choice and Analysis Laboratory and Grant No of National Research University Higher School of Economics, Moscow Affiliation, and from Deutscher Akademischer Austausch Dienst (DAAD). Stefan Traub is a member of the Collaborative Research Center 597 Transformations of the State at the University of Bremen, where he co-directs the subproject The Tax State and International Tax Policies. Financial support by the Deutsche Forschungsgemeinschaft (DFG) is gratefully acknowledged. We are indebted to the Luxembourg Income Study Database for access to their data and technical support. Last but not least, we would like to express our sincere thanks to Springer Verlag, in particular to Dr. Martina Bihn, for very helpful and pleasant support and cooperation. Finally, we would like to express our humble hope that our readers will enjoy our book as much as we enjoyed writing it. Of course, all mistakes and errors are our own. Kiel, Germany Pasadena, CA Bremen, Germany February 2012 Christian Seidl Kirill Pogorelskiy Stefan Traub

11 Contents 1 Introduction: Measuring Tax Progression... 1 Part I Theory 2 Local Measures A Digest of the Development of Income Taxation Measuring Progression of Tax Schedules Equal Sacrifice Principles GlobalMeasures Preliminaries and Notation Differences of Inequality Measures Ratios of Inequality Measures Maximum Difference of Concentration Curves Welfare Considerations Pros and Cons of Global Measures Uniform Measures Identical Income Distributions Different Income Distributions: Continuous Version Different Income Distributions: Discrete Version Heuristics of Progression Comparisons First-Moment Distribution Functions Uniformly Greater Progression Interrelationships Among Progression Measures Part II Applications 5 Data and Fiscal Institutions of the Surveyed Countries Data Handling LIS Data Forming Compatible Data Sets Fiscal and Social Institutions Australia Canada xi

12 xii Contents Denmark Finland Germany Israel Netherlands Norway Sweden Switzerland Taiwan United Kingdom United States of America Qualitative Results Introduction International Progression Comparisons Categorical Summary Results Empirical Interrelationships Among Progression Concepts Intertemporal Progression Comparisons United States of America United Kingdom Germany Equivalence-Scale Progression Comparisons Statistical Test Results Methodology International Progression Comparisons Intertemporal Progression Comparisons Quantitative Results Introduction International Progression Comparisons United States Versus United Kingdom United States Versus Germany United States Versus Sweden United States Versus Israel United States Versus Taiwan United Kingdom Versus Germany United Kingdom Versus Sweden United Kingdom Versus Israel United Kingdom Versus Taiwan Germany Versus Sweden Germany Versus Israel Germany Versus Taiwan Sweden Versus Israel

13 Contents xiii Sweden Versus Taiwan Israel Versus Taiwan Intertemporal Progression Comparisons United States United Kingdom Germany Conclusion References Index

History of Social Law in Germany

History of Social Law in Germany ThiS is a FM Blank Page Michael Stolleis History of Social Law in Germany Translated from the German by Thomas Dunlap Michael Stolleis Max-Planck-Institut für europäische