IMPLICIT TAXES AND PROGRESSIVITY

Abstract

Scholars suggest that failure to include implicit taxes in analyses of vertical equity understates the progressivity of the tax system. This paper develops an analytic expression for imputing the implicit tax associated with tax-exempt bonds using the tax-exempt interest income reported on individual income tax returns. To measure progressivity, Kakwani indices are calculated using three definitions of income and three measures of tax liability. In addition, the indices are computed by adding implicit income to the income measure. Examination of the Kakwani indices leads to the conclusion that the tax system is progressive for all measures of tax liability. Total tax (explicit plus implicit), measured against explicit plus implicit income, is more progressive than explicit tax measured against explicit income. Including the implicit tax associated with tax-exempt interest in the measurement of tax progressivity increases the level of progressivity of the tax system slightly.

Citation

Iglarsh, H.J. and Gage Allan, R. (2003), "IMPLICIT TAXES AND PROGRESSIVITY", Porcano, T.M. (Ed.) Advances in Taxation (Advances in Taxation, Vol. 15), Emerald Group Publishing Limited, Leeds, pp. 93-109. https://doi.org/10.1016/S1058-7497(03)15004-1