be a preferred policy for the majority of tax payer population.
Finally, we focus on the elasticity of the tax functions corresponding to the reforms
proposed, according to the theoretical results obtained in Section 4. Let η measure the
elasticity of gross-tax liability with respect to income. This parameter has been computed
after comparing the fiscal revenues obtained from the corresponding tax T1,1 , T2,2 and T3,3
before and after multiplying all pre-tax income sources by 1.01. The elasticity coefficients
obtained by micro-simulation are important in magnitude (1.46, 1.47). However, they do
not strictly reflect the elasticity due to the ‘shape’ of the tax function, the coefficient we
are interested in. Since taxable income is obtained from pre-tax income after application of
allowances and income-related deductions, we may expect substantial increase in elasticity
for taxable income if those fiscal credits are not upgraded in line with income. There is also
another effect which refers to those recipients with zero taxable income, which is upgraded
into liability as a consequence of the income increase.
We formulate the tax elasticity respect to pre-tax income as the product of the taxable-
income η1 and tax rate η2 elasticities, η = η1η2, where η1 depends basically on allowances and
deductions. Coefficient η1 is directly estimated by using the micro-simulation model and it
takes the same value for each tax cut, which is equal to 1.36. Elasticity coefficients associated
with the rate structure of each tax function are then computed from the ratio between η and
η1 , which are shown in Table 2. Results reveals that T2,2 tax cut produces the most elastic
revenue source of the three types of progressivity-cuts, and obviously, T2,2 generates more
revenue than the other tax cuts. By contrast, T1,1 generates the lowest revenue of the three
taxes, confirming the hypothesis outlined in Section 3.
The consequences for the distribution of tax burdens among tax units will be depend on
the tax elasticity at all values of observed pre-tax incomes. We compute ‘average’ elasticity
coefficients η and η2 for each income group (see Table A.3 in the Appendix). As we observe
from this table, the elasticity values of the tax schedule bear out the theoretical results, in
the sense that η2 (T2,2) ≥ η2(T3,3) ≥ η2(T1,1).
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