Measuring the Distributional Impact of Taxation and Public Spending: The Practice of Fiscal Incidence Analysis

No 24, Commitment to Equity (CEQ) Working Paper Series from Tulane University, Department of Economics

Abstract: Taxation and public spending are key policy levers the state has in its power to change the distribution of income. One of the most commonly used methods to measure the distributional impact of a country’s taxes and public spending is fiscal incidence analysis. Rooted in the field of Public Finance, fiscal incidence analysis is the method utilized to allocate taxes and public spending to households so that one can compare incomes before taxes and transfers with incomes after them. Standard fiscal incidence analysis just looks at what is paid and what is received without assessing the behavioral responses that taxes and public spending may trigger on individuals or households. This is often referred to as the “accounting approach.” Although the theory is quite straightforward, its application can be fraught with complications. The salient ones are discussed here. While ignoring behavioral responses and general equilibrium effects is a limitation of the accounting approach, the effects calculated with this method are considered a reasonable approximation of the short-run welfare impact. Fiscal incidence analysis, however, can be designed to include behavioral responses as well as general equilibrium and inter-temporal effects. This article focuses on the implementation of fiscal incidence analysis using the accounting approach.

Keywords: Fiscal incidence; taxation; social spending; transfers; pensions; progressivity; distributional effects; inequality; poverty; marginal contribution; effectiveness; valuing in-kind transfers. (search for similar items in EconPapers)
JEL-codes: D31 H22 I32 I38 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2019-09
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Commitment to Equity, October 2019, pages 1-43

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http://repec.tulane.edu/RePEc/ceq/ceq24.pdf First version, 2019 (application/pdf)

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Working Paper: Measuring the distributional impact of taxation and public spending: The practice of fiscal incidence analysis (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:tul:ceqwps:24

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