L. Matthiessen asserted in his article "Index-tied Income Taxes and Economic Policy, "
Swedish Journal of Economics, 1973, (pp. 60-61), that "in terms of the overall measures of distributional unevenness it is clear that (1) non-real factor income rises will increase inequality within any income bracket and (2) the same
may be true for all income earners as a group." His proposition (1) is correct, however, the assertion (2) remains to be examined.
In this paper, it is shown most likely that uniform nominal income rises will
decrease inequality of after-tax income distribution as a whole through the progressive structure of personal income taxation. This proposition is deduced from the following specification, which fits Japanese tax data quite well: p(y)=Cyτ, 0〈C〈1, τ〉1, where y, p are an income level, the income tax respectively. Moreover, the escalator clause in tax deductions only will also decrease inequality of that distribution.
In Japan, "tax-cut" policy has been taken as one of the main annual tax reforms. The tax-cut policies centered on real increases of tax deductions in personal income taxation, have not resulted in decreases of inequality for all income earners as a group. Rather, they have made the income-redistribution effect of personal income taxation less powerfull. Benefits of tax deductions are fully enjoyed only if before-tax income levels exceed the deductions limit. Then, real increases of tax deductions widened the range of income earners who are below the deductions limit, which caused the above change of that effect.
From the policy point of view, the escalator clause in negative income tax is most advisable for an inflation-neutral taxation.
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