Levelling up: Vertical progressivity against horizontal equity and neutrality in the analysis of tax reforms

The political analysis of the redistributive role of taxes is gaining importance in an unequal world. People are claiming more progressive tax systems, particularly taxing the wealthiest 1% of the population to have more egalitarian fiscal pacts. Although some scholars have insisted on the role of taxes in diminishing inequality through progressive tax systems, different international organisations (IMF, WB, IDB), some academic circles, and policy experts continue promoting neutrality-type of tax reforms to foster the tax system’s efficiency. The latter consider focusing on the expenditure side of fiscal policies to achieve redistribution. Given this normative and theoretical dispute, it is then worth asking whether the current indexes of tax progressivity can reflect the effects of neutral-type tax reforms in the progressivity of tax systems, particularly whether the richest of the population have been paying more taxes than the bottom during the last decades. Besides the efforts of some scholars to analyse the vertical equity - the principle that those at the top of the socioeconomic ladder should be taxed more heavily - and the progressivity of the tax systems (see Rubolino and Waldenström (2020) for further references), there is not a systematic approach that allows us to evaluate the evolution of vertical equity and progressivity appeals in tax systems. Inspired by the Palma Ratio index of inequality, I introduce a new concept, “vertical progressivity”, combining the ideas of vertical equity and tax progressivity. The concept of vertical progressivity is measured with a new instrument, the “progressive vertical index”, which concentrates the analysis on the evolution of the average tax rates paid by the wealthiest 1% of each country over a period - with respect to the average tax rates paid by the bottom of the income distribution. The progressive vertical index will show a country’s situation in a specific year, indicating whether the wealthiest 1% have higher or lower effective tax rates than the bottom group. It will also show the trend of a country and allow comparisons between different countries. For testing the index, I work with a novel dataset developed by De Rosa, Flores and Morgan (2021) that contains the average tax rates of each percentile of the population of ten countries of Latin America during the 2000-2019 period, which are calculated following the methodology of Saez and Zucman (2019). The proposed progressive vertical index is part of my PhD research project, helping to examine further questions: What is the role of political institutions in explaining upward or downward trends in vertical progressivity? How do businesses, wealthy individuals and institutional legacies influence or prevent the implementation of reforms that promote vertical progressivity? How do neutral-type of tax reforms explain changes in vertical progressivity in time? As in the case of my project, the progressive vertical index will allow policymakers, scholars, and international institutions to expand their research on the redistributive role of taxes.