Research :: Finished research :: 2001-2005
The Redistributive Effects of Income Tax in Croatia

Project manager: Ivica Urban, Institute of Public Finance

The contents of the research

Assembling information about income, relief and income tax paid for given taxpayers in several periods in the past; putting the figures in order and calculating the necessary variables

  1. Compiling a review of scholarly and research literature in the area
  2. Analysis of data and calculation of the necessary indicators
  3. Composing the conclusions of the analysis and recommendations for political decision-makers

The goal of the investigation is to measure the progressiveness and redistributive effect of income tax

Explanation of the topic: Social well-being can be increased either by the rise in overall income or by the reduction of inequalities in the distribution of income. A state endeavours to achieve both of these.

By the protection of property rights, by investment in education and infrastructure and so on, it endeavours to provide the best conditions for economic growth and development. On the other hand, through progressive taxation and transfers of money to the population with a lower standard of living it endeavours to achieve a redistribution of income.

In fact, every move made by the state has some effect on the redistribution of income. Just how much income will be redistributed depends on the preferences of society vis-à-vis inequality.

After both phases of the fiscal process – collection of resources and spending – are completed, some individuals turn to be out net winners and some net losers. If the net winners are persons with lower incomes, and the net losers persons with higher incomes, then we can say that the fiscal system has reduced inequality. Fiscal processes that reduce income inequality are usually called progressive, while those that increase inequality are called regressive. To measure the redistributive effect of the entire fiscal system would be an extraordinarily complex not to say impossible task. Hence investigators tend to opt for an analysis of individual components of the system.

In most countries, including Croatia, income tax has as its purpose the redistribution of income. Taxpayers with higher incomes pay this tax at higher effective rates than taxpayers with lower incomes.

The progressiveness of income tax is achieved through a combination of two elements:

  • the personal allowance, which is independent of the size of income, for it is evenly distributed to taxpayers
  • the statutory tax rates, which increase as income increases

The total redistributive effect of tax depends on one more element, which is horizontal inequality. This appears when two taxpayers with the same pre-tax income pay different amounts of tax. Horizontal inequality diminishes the redistributive effect of the tax, and is brought about by tax reliefs.

In addition, the total effect of redistribution depends on the average tax burden. For income tax can be progressive and yet if the tax rates are low the redistributive effect will be small

Method of work:

  • Descriptive statistics:
    • income according to source (wages, pensions, self-employment and so on)
    • distribution of income and tax paid per income bracket; effective rates of taxation
  • Indices of income inequality, the redistributive effect and the progressiveness of the tax

These indices will be calculated with the use of the function of social well-being for which parameters of aversion to inequality are set. They reflect the ethical sensitivity of society to inequality and justify the redistribution of income via progressive taxation.

Duration of the research: 7 months

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