Behavioral Responses and the Distributional Effects of Personal Income Taxes

35 Pages Posted: 3 Nov 2012 Last revised: 7 Dec 2012

See all articles by Denvil Duncan

Denvil Duncan

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA); Institute for the Study of Labor (IZA)

Date Written: October 30, 2012

Abstract

This paper simulates the distributional impact of the Russian personal income tax (PIT) following the flat tax reform of 2001 using data from the Russian Longitudinal Monitoring Survey. I decompose the change in the distribution of net income into a direct (tax) effect and an indirect effect. The indirect effect is further decomposed into evasion and productivity effects using existing estimates of these respective elasticities. As expected, the direct tax effect increased net income inequality. Changes in the pre-tax distribution (indirect effect), on the other hand, had a large negative impact on inequality thus leading to an overall decline in net income inequality. I also find that the tax-induced evasion response increased reported net income inequality while reducing consumption. To the extent that consumption approximates actual income, these results demonstrate that the PIT affects actual income inequality differently than it does reported income inequality.

Keywords: Income distribution, evasion, simulation, taxes, consumption

JEL Classification: D3, D63, H24, H26, H31

Suggested Citation

Duncan, Denvil, Behavioral Responses and the Distributional Effects of Personal Income Taxes (October 30, 2012). Indiana University, Bloomington School of Public & Environmental Affairs Research Paper No. 2012-11-01, Available at SSRN: https://ssrn.com/abstract=2170389 or http://dx.doi.org/10.2139/ssrn.2170389

Denvil Duncan (Contact Author)

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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