Page 319 - Invited Paper Session (IPS) - Volume 2

IPS264 Oliver H. et al.
The impact of redistribution through taxes and
deductions on the income distribution – A
decomposition analysis with administrative tax
data from Switzerland
Oliver Hümbelin , Rudolf Farys
1
2
1 Bern University of Applied Sciences
2 University of Bern

Abstract
This paper shows the potential of administrative data to grant 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 effect
decomposition to demonstrate how 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 high 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. In sum,
deductions reduce the equalizing effect of the tax progression and therefore
increase inequality.

Keywords
Redistribution effects; tax deductions; direct taxes; tax competition,
Switzerland

1. Introduction
Redistributing economic resources is an important tool for the welfare
state to reduce market inequalities. In this context, the OECD (2011, 2015)
points out that the recent increase in disposable income inequality has been
caused less by escalating markets but rather by a retreat of government.
Therefore, it is important to fully understand the redistribution mechanics of a
welfare state. Redistribution occurs due to social transfers and taxes. The
degree of redistribution through taxes is usually attributed to the tax
progression. Yet many countries also provide options for claiming deductions
that alter the redistributive effect of taxes. This latter aspect is often neglected
since common survey data only reports the amount of taxes paid.
Administrative tax data offers a good opportunity to analyze the visible (taxes)
and hidden (deductions) instruments of the welfare state in detail, as it
contains complete information of the tax assessment.
The present study uses Swiss individual tax data from the canton of Aargau
as an exemplar for Switzerland. Since the study is based on real tax data, it is

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