Analysing Progressivity of Personal Income Taxes: A Case Study of India

This paper suggests two models for isolating empirically the effects of the income inequality and the tax parameters from their combined effect on the progressivity of real world personal income taxes. The inequality in the distribution of income and the graduation in the tax rates are found to significantly influence the progressivity of the tax. It is depicted that in an economy with a low or high level of income inequality, income redistributive policies would lead to greater changes in the progressivity of the tax as compared to that in an economy with moderate level of income inequality. Further, in an economy with a high level of graduation in the tax rates, an increase in the graduation is unlikely to significantly enhance the effective progressivity of the tax. The developing countries cannot rely much on the steep graduation in tax rate for their economic reforms. Analysis of the Indian data for the period 1961-62 through 1983-84 shows that if the effective progressivity is to be improved then the tax reforms should be aimed at raising statutory tax progressivity through larger reductions in the marginal tax rates at lower income levels besides better enforcement of the tax laws.