DISTRIBUTIONAL EFFECTS OF THE NORWEGIAN TAX REFORM OF 2006

DISTRIBUTIONAL EFFECTS OF THE NORWEGIAN TAX REFORM OF 2006 This paper summarizes the results of recent work carried out on distributional effects of the Norwegian tax reform of 2006. The evaluation strategy is based on applications of micro data for descriptions of total redistributional effects and horizontal inequity effects, using income data for the period 2000-2008. The tax redistributional effect includes both vertical and horizontal effects; the vertical effect of the tax schedule refers to compression of the income distribution in the transformation from pre-tax income distribution to post-tax income distribution, whereas the horizontal inequity effect of taxation stands for the unequal treatment of equals. We apply recently developed methods for closer identification of tax policy changes over time on overall redistributional effects. Tax redistributional effects are measured in terms of a "common base" approach, which means that a benchmark is established facilitating identification of how the redistributional efforts of policy-makers develop over time. Horizontal tax effects of the reform arc described by an estimation technique that effectively separates horizontal inequity effects from vertical redistribution. We find that modification of the dual income tax system of the 2006 reform has improved the redistributional effect of the schedule and at the same time reduced horizontal inequity. This conclusion is qualified by addressing measurement challenges brought up by the reform, such as behavioural responses and timing effects.