Mexican social benefits are classified as either means-tested or non-means tested see Table A1 from Appendix. Regardless the poverty condition in our database we found that 32 per cent of households received at least one means-tested transfer in The most relevant transfer given to the poor is Prospera; Moreover, the elderly programme is the second largest means-tested transfer; Conversely, the pensions system is considered to be a non-means tested transfer due to the fact that payments are made on the basis of previous social security contributions.
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In , In recent years there has been a renewed interest in discussing theoretical and empirical issues on the redistributive mechanisms of income and their impacts on income inequality. There are some alternative approaches that use decomposition techniques to investigating distributional implications resulting from changes in the fiscal systems.
Bishop, Formby and Thistle analysed inequality from income sources and household characteristics in the US based on the Tax Reform Act of They found that the Act has a neutral effect as no subgroups of the population were better-off or indeed affected by the reform. Mills and Zandvakili examined the redistributive effects before and after taxes and transfers in the US using decomposable measures of inequality according to household size and fiiling status. Immervoll et al. Findings revealed that countries achieved a higher inequality reduction mainly by using non-means tested benefits and taxes.
Kaplanoglou and Newberry analysed alternative indirect tax structures in Greece and estimated the redistributive effect of the vertical and HI components. They found that VE is possible, even when more HI is induced by indirect tax reforms.
They manifested how the redistributive effect had a major impact on reducing poverty in Sweden; additionally, the Canadian tax system was most successful in avoiding increased poverty levels. Bird and Dendron analysed the need for research into developing and transitional countries; these authors, explain the need to work on priority reforms to reduce HI by improving indirect taxation.
Even though both countries share a similar background in terms of politics, findings revealed that their fiscal systems had different outputs. Despite Slovenia having a higher level of HI than Croatia, the Slovenian fiscal system produces a greater impact on VE and, as a consequence, has a greater redistributive effect. However, a possible limitation of these studies is due to them using a local approach to evaluate the redistributive effect instead of the DJA non-parametric technique.
Urban analyses an alternative decomposition of the redistributive effect that results from a tax-benefit system in order to demonstrate the effects of VE and HI. This research is based on the models in Kakwani and Lerman and Yitzhaki ; this empirical application to the Croatian fiscal subsystem shows that taxes and benefits considerably decrease income inequality. Furthermore, the author assessed different approaches that are used to measure the contribution of separate tax and benefit instruments to the vertical and horizontal effects of a fiscal system.
This study developed a new methodology to precisely decompose the redistributive effect by merging the well-known Gini coefficient and Atkinson indices. This allows the total redistributive effect of taxes and transfers to be decomposed into a VE effect, and there is a loss of redistribution due to either classical HI or reranking. We now undertake a review of empirical studies for the Mexican case. The former, shows how an increase in VAT on food and providing cash-transfers to the poor would improve revenues and reduce inequality; meanwhile, in the later, the authors assert that Mexican VAT contributes to VE.
However, the redistributive effect is not completely effective due to high HI levels that are derived from VAT exemptions. To the best of our knowledge, there are a few studies that use the DJA decomposition to measure the redistributive effect of the Mexican fiscal system into three components: VE, HI and reranking. Huesca and Araar applied the DJA approach to determine the redistributive effect of the tax system in They did this in different ways: a from the point of view of tax-benefit system as a whole; b from the point of view of the tax component; c from the point of view of benefit component; and d from the point of view of the benefit system through isolating the effect of a specific cash transfer.
Results show that VE induced by the tax-benefit system is relatively important; however, its redistributive impact is reduced due to the high level of HI. Moreover, the Oportunidades benefit Programme had the highest redistributive effect as it provided the largest coverage for the deprived section of the Mexican population. In addition, Huesca, Robles and Araar use the DJA model to determine the overall effect the tax-benefit system has on inequality by comparing the situation in with two simulated scenarios: a applying the fiscal rules, and b applying a 16 per cent VAT flat rate without exemptions.
The changes that were made in the fiscal rules from to show a nil redistributive effect in the tax-benefit system, i. Through using HI, we would like to show the extent of the unequal tax treatment of equals those who have the same level of pre-fiscal income. Duclos et al. By using this application, we can decompose the difference between pre-fiscal income X and post-fiscal income N inequalities, as written in formula 1 :. I N P is the coefficient of concentration of N when the ranking variable is X p and I N E is the concentration index of purged net income from local inequality we assume that each individual has the expected value of post-fiscal income according to the level of his pre-fiscal income.
Alternatively, a growing gap will be a sign of greater inequality, which reverses the VE component in the total distribution. However, the higher that is, the higher the component of HI is. The more R that there is, the lower I N P is. A higher R implies a deterioration in the post-fiscal position of the individuals and households that are part of the fiscal system.
Non-parametric regression is used in order to capture those individuals who are equal in the distribution in order to estimate R 2. In this section, we begin by describing the data and show how it is organised to be able to construct the fiscal system component of this research.
We then analyse the empirical evidence using the DJA non-parametrical method to estimate the redistributive effect and the corresponding levels attached to HI and R. These have a negative effect on the total redistribution included in the VE component. This is the most recent data available and is comprised by a sample of 14, households and about Based on the microdata information provided, we proceed to build the distribution according to household equivalence units of income and following both direct identification methods and imputation methods when the sources could not be found in the survey Lustig et al.
We only used monetary units paid for taxes and cash transfers received within each household. We use a micro-accounting approach as no behaviour is considered to be at the micro survey level.
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In our case we do not consider this to be a major problem for our empirical results, an opinion that is clearly stated by Pudney and Sutherland and Bourguignon et al. Based on personal disposable income, it is possible to calculate the figures shown in Table A. When the vector on post-fiscal incomes is obtained after taxes in the survey, the current tax rules per source of income are applied. For direct taxes, we use the PIT of both wage earners and individuals who reported income sources as benefits obtained from business.
Similarly to conventional tax incidence analysis, we also assume that the burden of taxes relies on the last recipient of income. In order to rebuild the fiscal system from the post-fiscal income in the surveys, we consider the translation hypothesis for tax payments in Pechman Finally we grouped together the total income tax payments made by each household.
In the case of indirect taxes, we calculated VAT and IEPS special consumption tax figures by using the corresponding tax rules and by using the place of purchase indicated in the survey for controlling informal activities. Furthermore, the place of purchase as the main control for informal VAT allows uncollected indirect taxes to be identified in the whole database 4. For benefits, we used direct methods as these can be collected on a household level from the survey.
We do not consider transfers on a more aggregated level such as free or subsidized in-kind public services. This is because our purpose is to determine progressivity from the taxes paid and the well-known benefits received directly in cash by the households and not from funds entering as aggregate non-monetary sources. At the end, pre-fiscal income represents the aggregation of the total taxes and federal contributions from wages and social security contributions minus pensions and the cash benefits received on a house-hold level:.
Where X stands for the pre-fiscal income, N is the post-fiscal income, T is the tax burden, SSC is the social security contributions, P are the pensions and B are the benefits.
An Integrative Analysis of Tax Schedules and Income Distributions
There is no clear approach that considers pensions as a benefit component, at least the share of pensions added by the public sector. In our case, we treat pensions as Cook et al. This research did not add retirement and pensions as means-tested transfers because of their contributive nature. We include the transfers related to pensions in the post-fiscal income figure as they are commonly estimated in the national accounts. In order to account for wellbeing in the household and use equal units of distributive analysis, the simplest method would be to use per capita income or an equivalent scale.
In order to determine the overall effect of the tax-benefit system on inequality and to show the different redistributive components, we use the DJA approach for the total Mexican fiscal system as well as for each fiscal instrument. Also, we estimated the following simulations one at a time to capture the isolated effect from a given tax-benefit: a the redistributive effect from a specific tax: by simulating a fiscal system that used a particular tax PIT, VAT or IEPS as the total tax bur-den and then added the rest of cash transfers see Table A2 , from Appendix ; b the redistributive effect from specific benefits: by simulating a fiscal system that included the total tax burden but only one cash transfer at a time see Table A3 , from Appendix.
Before we proceed with the empirical application to compute redistributive effects, we have estimated pre and post fiscal equivalent incomes in order to be able to look at the feasibility of redistribution. At first sight, this provides both positive negative conclusions about the impact of the Mexican fiscal system. The poverty lines separates Figure 1 into four areas. In panel A lower-left area , households are more affected by redistribution, their post-fiscal incomes remain under the threshold and the cash transfers they receive are insufficient for them to leave out the poor group.
Panel B lower-right area allows us to observe how the tax-benefit system prejudices non-poor households, pushing them to fall into poverty. In contrast, panel C upper-left area shows the households that have benefit from redistribution and therefore ceased to be poor. It is desirable that a higher number of households fall into this area than what is shown by the actual results. In order to compare our results, we begin by briefly describing the characteristics of the Croatian and Slovenian fiscal systems.
Table 1 presents the joint estimations for the fiscal system as a whole and captures the redistributive incidence from taxes and benefits. For instance, initial inequality was 0. As can be seen in Table 1 , RE estimates were Remembering that RE is simply the change in inequality. However, this positive effect is significantly reduced by the two components HI and R. For instance, the component HI reduces the VE by This shows the need of improving the redistributive programs to avoid the high horizontal inequity. This can be for instance, by improving the existing programs to better target the poor, or also, by simplifying that tax system.
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