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It Takes Two to Tango Income and Payroll Taxes in Progressive Tax Systems

Author

Listed:
  • Victor Amoureux

    (Institut national de la statistique et des études économiques (INSEE))

  • Elvire Guillaud

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques (Sciences Po) - Sciences Po - Sciences Po)

  • Michaël Zemmour

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract
The literature on tax systems generally considers each type of tax in a self-contained way, with its own distributive characteristics. While the income tax is considered as a progressive tax, social insurance contributions are seen as being regressive, namely because of ceilings. Using a database of comparative micro-data at the household level (LIS data, 22 OECD countries, 1999-2016 period), supplemented with OECD data on employer contributions, we measure effective tax rates over the entire income distribution. Our results jeopardize the conventional economic wisdom on the role of income and payroll taxes in tax progressivity, and on their respective impact on inequality reduction. We show that, in all countries of our sample, the progressivity of income tax increases as soon as the progressivity of social insurance contributions decreases. This implies that income and payroll tax schedules are not independent. Even more, they act in a complementary way. While payroll tax heavily compress inequalities at the bottom of the income distribution, income tax reduces inequalities at the top.

Suggested Citation

  • Victor Amoureux & Elvire Guillaud & Michaël Zemmour, 2019. "It Takes Two to Tango Income and Payroll Taxes in Progressive Tax Systems," Working Papers hal-02735278, HAL.
    • Handle: RePEc:hal:wpaper:hal-02735278
    Note: View the original document on HAL open archive server: https://hal.science/hal-02735278
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    References listed on IDEAS

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    1. Demetrio Guzzardi & Elisa Palagi & Andrea Roventini & Alessandro Santoro, 2022. "Reconstructing Income Inequality in Italy: New Evidence and Tax Policy Implications from Distributional National Accounts," World Inequality Lab Working Papers halshs-03693201, HAL.

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    More about this item

    Keywords

    income tax; social insurance contributions; inequality reduction; progressivity;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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