TY - JOUR AU - Hümbelin, Oliver AU - Farys, Rudolf PY - 2018/05/16 Y2 - 2024/03/29 TI - Income redistribution through taxation – how deductions undermine the effect of taxes JF - Journal of Income Distribution® JA - JID VL - 26 IS - 1 SE - Articles DO - 10.25071/1874-6322.40330 UR - https://jid.journals.yorku.ca/index.php/jid/article/view/40330 SP - 1-35 AB - This paper shows the potential of administrative data to grant us a more complete picture of the redistributive effects of the visible (tax rates) and hidden (tax deductions) instruments of the fiscal welfare state. Based on administrative tax data from a large Swiss canton, we apply a gini-based redistributive effect decomposition to demonstrate how several taxes and deductions impact the post-tax income distribution. We show that tax deductions drastically reduce the redistributive effect of taxes because lump sum deductions in a progressive tax system lead to greater tax relief for higher income earners. Moreover, high income earners have additional options to claim deductions such as real-estate expenses or extra-mandatory payments to the pension scheme. Comparison over time furthermore shows that the role of deductions for real-estate expenses decreased. All in all, because deductions reduce the redistributive effect of taxes, they lead to higher post tax income inequality compared to a hypothetical system without deducations. The redistrubtive effect of the tax system should therefore be studied, not only with respect to tax rates, but also with respect to deductions. ER -