DECOMPOSING THE GINI COEFFICIENT TO REVEAL THE VERTICAL, HORIZONTAL, AND RERANKING EFFECTS OF INCOME TAXATION

Taxes may treat equals unequally, they may treat unequals unequally, and they may cause the ranking of people from poor to rich to be different posttax than it was pretax. This paper offers geometric and mathematical techniques for measuring and computing the above three effects. They are referred to as the vertical, horizontal, and reranking effects. Several scholars currently equate the reranking effect with horizontal inequity. We show, however, that the reranking effect is separate and distinct from the traditional concept of horizontal equity. Our measures are derived by comparing the pretax and posttax Gini coefficients and decomposing the total redistributive effect of the tax. We compare our method to others and provide some preliminary empirical estimates for the income taxes used in the United Kingdom and Italy. For the United Kingdom and Italy, vertical effects dominate horizontal and reranking effects. However, we suspect that for the United States income tax the horizontal and reranking effects will have greater relative importance.