Ivica Urban, Higher Scientific Associate at the Institute of Public Finance, Marko Ledić from the Faculty of Economics and Business in Zagreb and Ivica Rubil from the Institute of Economics, Zagreb co-authored the paper Tax progressivity and social welfare with a continuum of inequality views in the journal International Tax and Public Finance, in which they developed a framework for analysing the loss of social welfare due to taxation, where tax progressivity and regressivity, expressed through the Kakwani Index, are interpreted in the sense of welfare gain or loss.

Taxes always cause a drop in social welfare; however, it seems that this drop is milder per unit of tax collected depending on the level of the tax’s progressivity. The perception of inequality of tax income differs from one person to another; in other words, inequality can be “viewed” from several perspectives. The specific view will define the perception of the role of tax progressivity on the drop in social welfare due to taxation. In order to measure the said progressivity effect, in 2021 Nanak Kakwani and Hyun Hwa developed a model that covers an “absolute” and “relative” view.

In their paper, Ledić, Rubil and Urban extend the said model by considering a variety of “intermediary” views on inequality, lying somewhere in between the absolute and relative views. The new model has been applied to analyse the Croatian tax system. The analysis has shown that our system is progressive for the full range of various views on inequality. When individual types of taxes are considered, personal income tax and mandatory contributions are progressive in all perspectives, whereas indirect taxes are progressive for half of the views (those nearer to the absolute view) and regressive for the other half (those nearer to the relative view). If, hypothetically speaking, the current tax system should be replaced by a neutral system of distribution (neither progressive nor regressive), the loss of social welfare would be greater than in the current system, but the severity of this loss would depend on the selected view of inequality.