POLARIZATION CHARACTERIZATION OF INEQUALITY-NEUTRAL TAX REFORMS

Abstract

In this article, polarization measurement is presented as a useful tool for characterizing the net transfers of income between individuals caused by a tax reform. The bipolarization measure, which considers just two poles and involves the disappearance of the middle class, may complement inequality measures insofar as it provides an alternative explanation of the distributional impact of inequality neutral tax reforms. Some theoretical implications of an inequality- and revenue-neutral tax reform concerning polarization are examined. We conclude with an empirical application where we carry out a simulation to evaluate the effects on polarization of a potential substitution of the current Spanish tax system for an inequality- and revenue- neutral linear tax.