How deductions undermine the redistribution effect of taxes - Research with Swiss tax data

In many OECD countries, the inequality between the rich and the poor has increased in recent decades. Some authors put the blame on the withdrawal of the state, which is redistributing less and less through progressive taxes and social benefits. In comparative studies Switzerland is seen as a country with low economic inequality and low redistribution. At the same time, the analysis based on the tax statistics of the Federal Tax Administration shows a significant increase in inequality between and within individual cantons. Since a large proportion of direct taxes in Switzerland are regulated at the cantonal level, it seems appropriate to conduct welfare state analyses at this level. Tax data offer special opportunities with the level of detail of the tax data making it possible to examine direct effects of the progression of federal, cantonal and municipal taxes but also indirect effects of tax deductions. The main part of the talk presents empirical results from a large Swiss Canton to demonstrate this potential. Using a Gini-based redistribution effect decomposition, it is possible to gain a complete picture of the redistribution effects of the visible (tax rates) and hidden (tax deductions) fiscal instruments. The latter are often not included in international comparative studies due to a lack of data and therefore only little is known about the effects of deductions on the post-transfer income distribution. At the same time, we argue that it seems to be an important feature to fully understand the tax system.