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, a nd they may cause the ranking of people from poor to rich to be differ ent posttax than it was pretax. This paper offers geometric and mathem atical techniques for measuring and computing the above three effects. They are referred to as the vertical, horizontal, and reranking effec ts. Several scholars currently equate the reranking effect with horizo ntal inequity. We show, however, that the reranking effect is separate and distinct from the traditional concept of horizontal equity. Our m easures are derived by comparing the pretax and posttax Gini coefficie nts and decomposing the total redistributive effect of the tax. We com pare our method to others and provide some preliminary empirical estim ates for the income taxes used in the United Kingdom and Italy. For th e United Kingdom and Italy, vertical effects dominate horizontal and r eranking effects. However, we suspect that for the United States incom e tax the horizontal and reranking effects will have greater relative importance.