Page 326 - Invited Paper Session (IPS) - Volume 2

IPS264 Oliver H. et al.
which the different income classes actually claim deductions. The effect of
deductions on redistribution is therefore hard to predict, and the present
study disclosed these effects using administrative individual tax data that
contains complete information on the taxing procedure from a large Swiss
canton. The results indicate that deductions have a massive impact on the
redistributive effect of taxes, therefore increasing inequality. For the case of
the canton of Aargau, we can show that the redistributive effect of taxes was
reduced by -49% in 2001 and -43% in 2011, respectively. Put simply, high
income earners disproportionately profit from deductions as they are more or
less flat (lump sums), while taxes are progressive, so the higher the tax paid,
the higher the tax relief. Due to that mechanism, deductions increase
inequality, which is not quite obvious at first glance. Second, high income
earners have more options to claim deductions (e.g. related to
homeownership). Another type of deduction that favors high income earners
is the transfer of money to the pension system. While this is thought of as an
incentive for people to save for old age, it is in practice an attractive option to
lower the marginal tax rate and to flatten out incomes over the life course.
Our paper provides detailed insights of redistributive effects as part of the
tax system and argues that income inequality and redistribution through taxes
should be examined not only in terms of tax rates, but also with an eye on
deductions in order to better understand the changing face of modern tax
systems, as they can drastically moderate the direct effects of taxes.

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