later. For tax increases, initial tax liability progression should be the relevant measure to be
considered.
Pfahler’s analysis deals with the case of only one tax function (in fact, he uses Income
Tax as a case in his study). The following question is consequently of interest. Are the above
results still valid for dual taxes, or more generally, for tax cuts (or increases) which are shared
by two or more different taxes?
In this paper, we extend the analysis of linear tax reforms to the dual tax case, both
theoretically and empirically. Specifically, we analyze if normative assessments derived from
Pfahler are accomplished in the case of dual taxes.
To do this, dual progression measures are defined for dual taxes and their relationship to
Lorenz dominance is discussed. Regarding Lorenz dominance criterion, it is proved that a
partial order among linear dual tax reforms can be established if certain condition -that will
be stated later- on income distributions is fulfilled, provided also that tax cuts are neutral-
revenue in the two different income bases. This result can be considered a benchmark to
guide reforms.
In the empirical part of the paper, we use a micro-simulation model to illustrate the
differential incidence analysis of linear tax reforms which comes from the theoretical results.
The rest of the paper is organized as follows. Section 2 formalizes linear tax reforms in the
case of dual taxes. Progressivity measures applied to dual tax schedules are discussed. Section
3 analyzes the effect of linear tax reforms on income inequality. Reforms are also compared in
terms of Lorenz dominance. Section 4 is dedicated to the analysis of tax elasticity. Section 5
analyzes the effects of different tax cuts applied to a dual tax by means of a micro-simulation
model which uses a large sample of Spanish income tax returns from 2005. We also study
the effect of the Spanish Personal Income Tax (Act ‘35/2006’) on the income redistribution
regarding the tax before reform. Finally, Section 6 concludes.
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