Decomposing personal income tax redistribution with application to Italy

The rise of wealth inequalities between and within nations is sustaining the request of reforming personal income taxes in many countries. A complete evaluation of the redistributive effects of tax instruments, however, implies investigating both vertical and horizontal equity aspects. I propose an augmented decomposition of the Reynolds-Smolensky index, where the reranking term is decomposed using geometric partition techniques, in order to measure how personal income tax instruments influence vertical and horizontal equity, as well. The application of the new method to novel Italian tax files suggests that the assessment of specific tax measures and/or tax reforms depends on which criterion of equity, vertical or horizontal, is adopted. The joint consideration of vertical and horizontal equity effects is also important when evaluating selected personal income tax instruments benefiting top income individuals and the tax measures adopted during the crisis. A specific focus on the regional redistributive effects of personal income tax is an additional key feature of this paper.