Income Tax Reform and Inequality: A Nonparametric Analysis

Abstract

Suppose the adoption of an income tax system by a government is guided by two objectives. The revenue objective requires that a sufficient amount of tax revenue should be collected. The equity objective dictates that the disposable income should be distributed with a degree of in equality that is acceptable as a social consensus. The purpose of this article is, by using nonparametric analysis, to evaluate the actual magnitude and direction of changes of a tax structure imposed by an objective-oriented tax reform. 1990 census data of the U.S. are used. The analysis is applied to the United States as a whole and the 50 states individually. Finally, given the tax receipts and equity level of the current tax schedule, an equivalent flat tax structure is derived.