Classical Horizontal Inequity and Reranking: An Integrated Approach

Abstract

The last 20 years have seen a significant evolution in the literature on horizontal inequity (HI) and have generated two major and "rival" methodological strands, namely, classical HI and reranking. We propose in this paper a class of ethically flexible tools that integrate these two strands. This is achieved using a measure of inequality that merges the well-known Gini coefficient and Atkinson indices, and that allows a decomposition of the total redistributive effect of taxes and transfers into a vertical equity effect and a loss of redistribution due to either classical HI or reranking. An inequality-change approach and a money-metric cost-of-inequality approach are developed. The latter approach makes aggregate classical HI decomposable across groups. As in recent work, equals are identified through a nonparametric estimation of the joint density of gross and net incomes. An illustration using Canadian data from 1981 to 1994 shows a substantial, and increasing, robust erosion of redistribution attributable both to classical HI and to reranking, but does not reveal which of reranking or classical HI is more important since this requires a judgement that is fundamentally normative in nature.

Equity during an economic crisis: Financing of the Argentine health system

“…This has been shown to be an important drawback even with large samples. It is for this reason that we use the Duclos et al (2003) (hereafter DJA) method, which presents a new way of carrying out the decomposition analysis by means of a continuous method involving a nonparametric estimation. This method has been recently applied to the health context by Bilger (2008), who discusses in detail its advantages over earlier decompositions.…”

Implementation Issues in the Duclos–Jalbert–Araar Decomposition of Redistributive Effect

“…The Duclos, Jalbert, and Araar (2003) model, despite its advantages over some other models, such as the Kakwani's (1984) and the Aronson, Johnson and Lambert's (1994) decompositions of RE, has not yet been broadly employed in empirical research.…”

Income redistribution and inequality in the Mexican tax-benefit system

“…Furthermore, the author assessed different approaches that are used to measure the contribution of separate tax and benefit instruments to the vertical and horizontal effects of a fiscal system. Even though Urban (2014) considered his proposal as a unique/complete approach to decomposition, Duclos et al (2003) had already proposed an ethical way to measure redistribution caused by a fiscal system, which integrated the two "rival" concepts of classical HI and reranking.…”

“…The term VE refers to the impact that a tax/benefit system has on inequality, where equals are treated equally. Duclos et al (2003) proposed a method to decompose the redistribution effect and change in inequality into these three components. By using this application, we can decompose the difference between pre-fiscal income X and post-fiscal income N inequalities, as written in formula (1):…”