CHAPTER V

BURDEN,PROGRESSIVITY M D IMPACT OP PERSONAL INCOME TAXATION OH INCOE3B DISTRIBUTION

In ancient times, the subjects of a country made

voluntary contributions to the state far the essential

functions discharged by the ruler which included protection

to person and property. Taxes were levied cautiously not to

prove a heavy 'burden' on the tax payers. The tax system

should be such as not to prove a great burden on the public,

The king should act like a honey bee which collects honey

without inconveniencing the plant or the flower

(Kautilya,Qth Century I3.C).

As the taxation transformed from a voluntary

contribution to a compulsory levy, the term 'burden' became

complementary to taxation, In modern times, the burden of

taxation is felt, be it direct or indirect, under any system

of government. Recently the political climate in any

country warrant8 that the tax burden, though exists, should

not be apparent, as Luc De Wolf (1983) observes that the

taxation system must look more pro-poor than it is allowed

to be in reality. Besides, there ier a close connection

between the system of government and t a x palicies(Thavaraj,

1992). They have more relevance in democracy than in any

other form of government. It is impossible to insulate

policy-making and tax administration from the vagaries and

exigencies of political climate in the government,

Thimmaiah (1986) supplements that by introducing so many

direct taxes together that political leaders tried to

convince the majority of the vast masses that the richer

people were bearing high burden of taxation and therefore

the massee should also contribute to whatever extent

poasible through indirect taxes for the development effort

of the country. This led to enormous increase in rates and

coverage of indirect taxea as well as direct taxes.

Among the direct taxes, taxes on income occupy a

prominent place in the tax system of the capitalist

countries. They have no or very negligible role in

socialist countries. For instance, there is no tax on

income in China and personal income taxation in USSR did not

provide more than 10 per cent of the total tax revenue,

while in U . S . A the receipts from personal income taxation

was 46.7 per cent ( as early as 1957) of ehe federal budget

revenues. In socialist countries,redisltribution of income

is mainly brought about by direct methods and not through

taxation (Radhika Daes, 1966).

It is in this context, Nicholas Kaldor (1980) observed

that the purpose of personal (or 'direct' ) taxation i a to

provide equity and fairness in the distribution of the tax

burden in the community. Looking at the problem from the

revenue aspect alone, it might be administratively simpler

to collect any given total of revenue by taxes on

transactions such as sales taxes, excise duties, etc. - or ad valorem taxes of various kinds - rather than by taxes levied on persons assessed according to some overall

criterion of 'ability to pay' on a graduated scale. In a

developing country, where privately owned wealth grows

rapidly and unevenly, a situation in which the burden

imposed on broad masses of population would become socially

intolerable, This problem is particularly important for

India which is on the threshold of a period of accelerated

economic development and whoae people desire to strike a

"middle road" between Western capitalism and Eaetern

socialism. In India the great bulk of national wealth is

and will continue to be privately owned, Induetries and

landed property that may be taken over by the state will not

fundamentally alter this state of affairs if duo

compensation is paid to the owners. Owing to the fact the

savings of the community are more unevenly distributed than

income, there is an inevitable tendency for wealth of the

largest property owners to grow at a faster rate than wealth

in general, unless effectively counteracted by the tax

system or other inwtrumenta of public policy.

The objective of improving the distribution of income

and wealth can be achieved through a number of policy

measures like land reforms, ceilings on urban property,

industrial policy, employment policies, pricing and

distribution policies etc. Fiacal policy is one of the most

important policies which can be used effectively for this

purpose (Srinivaan, 1974).

The objective of achieving a better distribution of

income and wealth has been given considerable importance in

India. In the Constitution of India, the Directive

Principles of State Policy clearly mentions that the

government should direct its policies so as to ensure that

the ownership and control of the means of production are

distributed in a manner to subaerve the common good and the

operation of the economic system does not lead to

concentration of wealth and means of production to the

common detriment. The various Five Year Plans have also

emphaaised this objective of reducing the inequalities of

income and wealth (Krishna Rao, 1987). In this context, to

maintain the principle of equity, progressivity has been

introduced in the area of personal income taxation.

The concept of 'Progressivity' emerged from the Adam

Smith'a canon8 of taxation which speak of the principle of

equity. Smith says: "It is not very unreasonable that the

rich should contribute to the public expenae not only in

proportion to their income, but Borne thing more than that

proportion" (Adam Smith, 1776). Dalton (1954) maintains that

the principle of sacrifice lead to progressive taxation

provided 'the marginal utility of income diminishes fairly

rapidly as income increases'.

After examining the importance of personal income

taxation in terms of burden, progressivity and its impact

on diatribution of income, the basic issue raised ia to what

extent personal income taxation in India is able to attain

the objective of progreaaivity and equality of distribution

of income and what the determinant factors of impact of

personal income taxation on distribution of income are.

In the above context, attempts have been made at the

global level to study the progressivity and burden of the

personal income taxation and their impact on the income

distribution. A number of seminal works exist at the global

level in this area and they include Fagan (19381, Chapman

(19431, Lutz(1947), Vickrey (1947), Grooves 419481, Muagrave

and Thin ( 1 9 4 8 ) , Musgrave (19591, Weisbroad and Hansen

(1968), Atkinson (1970,1973), Mirlesa (19711, Allingham and

Sandmo (19721, Sheshinkski (19721, Sen (19731, Joy (19761,

Khetal and Poddar (1976), Kakwani (1977)' Reynalds and

Smolensrky (1977), Suits (1977), Irvine (1980), Friesen and

Miller (19831, Kiefer (19841, Formby, Smith and Thistle

(1984,1987, 1990, 1992) Green and Balkan (19871, Pfahler

(19871, Fitaerald and Maloney (19901, Kern (19901, Stratmann

(19901, Udo Ebert (19921, and D'Souza (1995). Besidea,

studies related to India were made by Ved P , Gandhi (1970),

Bardhan and Srinivasan (19741, Amaresh Bagchi (19951, Anupam

Gupta (19751, Das Gupta (1976), Lakdavala (19761, Pulin B .

Nayak (19891, Anupam Gupta and Pawan K. Aggarawal (1982),

~othari (1987), Shekhar Mehka (19891, Satya Paul (19891,

Pawan K. Aggarwal (1989, 1990a, 1990b, 1991a, 1991b, 19921,

~ripesh Poddar (19901, Government of India (19921,

Parthasarathi Shome (19931, and Raja J. Chelliah (1994).

Though the above studies were scientific and

exhaustive, they did not concentrate on the impact of

structural dimension on burden and distribution of personal

income taxation and also the stability of determinants of

impact of personal income taxation on distribution of

income. In addition, the results of the above studies are

diversified in nature. Keeping these aspects in mind, the

present chapter attempts to investigate the following

objectives:

i) To examine the burden, progressivity and impact of

personal income taxation on distribution of income,

ii) To identify the determinants of impact of pereonal

income taxation on distribution of income and to test the

stability of the determinant8 of impact personal income

taxation on distribution of income.

Average burden and marginal burden concepts are used to

examine the burden of personal income taxation and it is

presented below:

Average burden of peraonal income tax = T/Y

Marginal burden of personal income tax =AT/ AY

Where,

T = Persoi 1 income tax,

Y = II)IC?C~' . . ~ c a h pal -,, d I i U

= Change.

To examine the redistributive impact of personal income

taxation, t a x level, tax progreseivity and Gini coefficient

ratios before and after t a x are cornpuked and it is presented

below:

Tax level can be represented by the weighted average of

etatutory marginal tax rate and it is computed as:

Where,

TL = Tax level,

156

m = Marginal tax rate ( A T/A Y) ,

w = Weight attached to the respective marginal

tax rate i.e., proportion of tax payers to

total tax payers in each income range.

Tax progressivity ia computed by using Kakwani's (1977)

measure of tax progressivity and it is defined as:

TP = [(l-t)/t)(Gl - G2)l Where,

TI? = Tax progressivity,

t = average tax rate (T/Y),

GI = Gini co-efficient ratio of income distributian before tax, and

G2 = Gini ca-efficient ratio of income distribution a£ ter tax.

Gini coefficient ratias of pre-tax and post-tax income

distribution are computed for examining the redistributive

impact of personal income taxation on income distribution

and it ia presented below:

n-1 n-1 C X Y - C Y X i=l i i+l i=I i i+l

Gini coefficient ratio = ............................... 10.000

Where,

xi = cumulative percentage of number of tax payers,

Yi = cumulative percentage of income.

For identifying the determinants of redistribution

impact of personal income tax on income diatribution, the

follawing loglinear multiple regression equation adopted by

Pawan K, Aggarwal (1990a) is employed and it is presented

below:

LRI = ag + a1 LTP + a2 LTL * a3 LIE + u

Where,

RI = Redistributive impact of personal income tax

on income diatribution i.e., the difference

between the Gini co-efficients of pre-tax and

post-tax income distribution,

Tax progressivity,

Tax level,

Inequality of pretax income distribution,

Random error term,

natural logarithm, and

parameters to be estimated and we expect the aign of that parameter are positive.

Chow test (1960) is employed to test the in£ luence of

structural diarturbances (change of political stability to

instability) on the stability of determinants of

redistributive impact of personal income taxation on income

distribution and it is presented below:

(RSS - ( R S S + RSS ))/K P 1 2

F = -------------A-e--------

(RSS + RSS ) / (n + n - 2 K ) 1 2 1 2

Where,

RSSp = Residual sum of squares of pooled regressiol

equation,

RSSl = Residual sum of squares of regression

equation of the first phase,

RSS2 = Residual sum of squares of regression

equation of the second phase,

K = Number of parameters, and

nl, n2 = Sample sizes of the two phases.

Empirical Result: and Discussion

On the basis of the objectives of our study the

analysis of the present chapter is divided into four

categories. They are:

i) Burden of personal income taxation,

ii) Tax level and Tax progressivity,

iii) Redistributive impact of personal income taxation

on distribution of income, and

iv) Determinants of impact of personal income taxation

on distribution of income.

(i) Burden of Personal Encome Taxation

The burden of a tax may be estimated in two dimensions,

average and marginal. The average burden signifies the

burden of taxation in absolute terms and is measured by the

ratio of t a x paid to the income of the t a x payers. The

marginal burden indicates the incremental burden of tax for

a change in incame of the tax payer.

Average burden of personal income tax in India across

selected income ranges during the study period from 1962-63

to 1988-89 i a shown in table 5.1. The study grouped the t a x

payers according to their income into four different

categories, The table shows the average burden of each such

group and also in respect to total tax payers over the

period of our study. In respect of all tax payers the

average tax burden has been consistently increasing from

0.1282 in 1962-63 to 0.1848 in 1988-89. There were certain

jinks in the trend to the lowest of 0.1173 in 1964-65 and to

the highest of 0.1958 in 1983-84. These minor deviations

are common in any trend analysis. The over all trend shows

that the average tax burden of peraonal income tax in India

has been increasing over the years. We understand that the

exemption limits have been raieed from time to time to

adjust to the rise in price and the t a x rates have been

varied to satisfy the tax payer=. But still the average tax

burden is on the upswing. This shows that the coqcessions

and incentives given in the form of exemptions and rebates

are only 'fiscal illusion' created by the tax

administrators, keeping the average burden constantly rising

over the years.

However, the group wise estimates of average tax burden

of personal income taxation in our country brings certain

facts to light. The average tax burden in respect of the

tax payers with income of Rs. 20,000 and below rose from

0.0401 in 1962-63 to 0.0874 in 1982-83 continuously but

dipped to 0.0274 in 1984-85 mainly due to reduction of

minimum tax rate from 30 per cent to 25 per cent during the

year. The continued falling trend may be associated with

the same factor clubbed with raising of the exemption limit

from Rs.15,000 to Rs. 18,000. The tax payers with the

income range of Rs.20,000 to Rs.50,000 have been treated

softly only after 1977-78. Their average burden which was

0.1978 in 1962-63 gradually rose to 0.2307 1974-75 started

slowly dimming downward to the lowest of 0.1052 in 1988-89.

This group is found to be benefitted by the tax rebates and

concessions extended during the period.

The third group of tax payers with income of Rs.50,000

to Rs. 1,00,00 have also been enjoying the benefits from

1962-63 onwards. Their relative average tax burden during

the study period declined from 0.4114 in 1962-63 to 0.2249

in 1988-89. The decline in the burden is almost continuous

except for a marginal dips in the intervening years.

The high income group with an income of above

Rs.1,00,000 has also been extended soft treatment with

reduced average tax burden during the study period. Their

burden was 0.6496 in 1962-63 which declined almost half of

it to 0.3811 in 1988-89. It is found that the highest

income group of tax payers also made use of the cancessions

extended to them.

The marginal burden of personal income tax across

selected income ranges is presented in table 5.2. Marginal

burden explains the degree of additional or reduced burden

of the tax burden as they move from lower income range to

high income range, The table shows clearly that in the year

1962-63 as the tax payer8 move from low incame group to high

income group their marginal tax burden increases from 0.0401

to 0.7791, while the mid two income groups having the

marginal burden of 0.2480 and 0.5789 respectively. In

respect of the first group of tax payers the marginal burden

was the highest in 1982-83 as the minimum tax rate was 30

per cent in that year, while the marginal tax burden was the

highest in respect of all other group in 1974-75, since the

highest maximum tax including surcharge stood at the

historic rate 97.75 per cent during the year.

(ii) Tax Level and Tax Progressivity

After examining the burden of personal income taxation

in terms of taxpayers income, let us examine the Lax level

and tax progressivity of personal income taxation, which

will throw 1 ight on redistributive impact of the personal

income taxation.

Redistributive impact of personal income taxation can

be studied by the Tax Level and Tax Progressivity. The tax

level is represented by a simple or weighted average of the

statutory marginal tax rates. In case of weighted average,

proportion of tax payers subjected to different marginal tax

rates may be taken as the weights. On the other hand, tax

progressivity indicates the degree of progression. The tax

level is zero at the no tax level and the tax progressivity

is zero when taxation is proportional. Therefore, positive

values of tax level and tax progressivity indicate the

distributive impact of the personal income taxation. In

other words, a rise in the tax level and tax progressivity

is expected to enhance redistributive impact of the tax.

Table 5.3 indicates the results of the tax level and

tax progressivity of personal income taxation in India

during 1962-63 to 1988-89 . From the table it may be

observed that both the tax level and tax progressivity have

their role to play in the distributive impact in respect of

personal income taxation in India. However, their value

trend being different and their impact showed some degree of

variations over the years. The tax level which was only

0.0613 in 1962-63 rose gradually to 0.2287 in 1988-89, shows

that its impact has been greater as the years passed. But:

the t a x progressivity shawed an uptrend upto 1966-67 and

moved dawnward thereafter. The tax progressivity was 0.3692

in 1962-63 and it increased to 0,6494 in 1966-67 and

declined to 0.3031 in 1988-89. This proves the fact that

the tax progre~~ivity l08t its vigour in bringing about

redistribution of income, while the tax level acquired more

important role over the years,

Ciii) RedistribP1ILkve Innpact of Personal Income Taxation on Distribution of Income

The redistributive impact of a t a x nay also be measured

using concentration index OE pre-tax and post-tax incomes by

employing Gini coefficient for the respective period. The

rewilts o f Gini Coefficient of income distribution before

and after personal income taxation in India during 1962-63

to 1988-89 are presented in table 5.4. From 1962-63 to

1970-71 the concentration ratio of pre-tax income had been

around 0.4 and afterward8 it started declining to the lowest

of 0.2254 in 1981-82 and later gradually rose to reach

0.3092 in 1988-89. The post tax concentration ratio was

0.3626 in 1962-63 which declined to 0.2405 in 1988-89 and

with little jerks during the intervening years.

The ratios of Gini coefficient before personal income

tax and after personal income tax provide a clear picture

of the changing effectiveness of income tax aa

redistributive measure. Since 1962-63 to 1988-89, the

personal income taxation proved to be a very effective

measure in bringing about redistribution of income in India.

Though there have been slight variations in the degree of

impact, any value greater than one shows the positive

impact. The table 5.4 also shows that the impact of

personal income taxation has been high daring certain years

due to several factors which include discretionary and non-

discretionary measures of per~onal income taxation.

(iv) Deteraginanka of Impact of Peraonal Income Taxation on Distribution of Income

After examining the impact of personal income taxation

on the income distribution, it is worthwhile to identify the

factors influencing the degree of its impact. This will

enable the policy makers to consider on the significant

determinant factors in implementation of required policy

measures to make the impact of the personal income tax on

income distribution more effective.

Before identifying the determinants of impact of

personal income taxation on income distribution we

constructed the required correlation matrix to identify the

chances of having multicollinearity problems among the

determinants. The results of correlation matrix between the

determinants and the impact of personal income taxation on

income distribution for the year 1962-63 to 1988-89, 1962-63

to 1974-75 and 1974-75 to 1988-89, are presented in table

5.5, 5.6 and 5.7 respectively. The atudy period is divided

into two phases, 1962-75 and 1975-89, for examining the

impact of change of political stability to instability on

the determinants of impact of personal income taxation on

income distribution. The relationship between the

determinants and the impact of personal income taxation on

income distribution are in the expected direction, during

1962-1989, 1962-1975 and 1975-1989. Besides, the

association between some of the determinants is quite high

and it may end up in a problem of multicollinearity.

However, we attempted to reduce khe problem to the minimum

by adopting step-wise regression equation and the neceseary

equation is selected for the analysis on the basis of (i) 2

high 6 value, and (ii) larger number of significant

explanatory variables.

The results of the determinants of the impact of

personal income taxation on income distribution for the

period 1962-1989 are presented in table 5.8. Equation-2 is 2

better than equation 1, due to its high R value and larger

number of significant explanatory variables and it is

presented below:

Eg = -1.1605 + 0,6169 LTP + 2.5117 LIE ( 2 9 . 4 3 ) " ( 1 6 . 9 8 I R (8.91)"

One per cent increase each in tax progressivity and

income inequality leads to an increase of 0.6169 per cent

and 2.5117 per cent of difference in Gini-coefficient ratio

between pre-lax and post-tax income distribution

respectively. This implies that the impact of tax

progressivity on reducing the inequality of distribution of

income are on the expected directions which means that a

rise in the t a x progreesivity is expected to enhance the

redistributive impact of the personal income tax. Besides, a

rise (fall) in income inequality will result in a rise

(fall) in the impact of personal income taxation on

redistribution of income, irrespective of the tax level and

tax progressivity,

The equations of the determinants of impact of personal

income taxation on income distribution are estimated

separately for the years 1962-63 to 1974-75 and 1975-76 to

1988-89. The results of the estimated equation for the

period 1962-63 to 1974-75 are presented below:

LG = - 1.2640 + 0.3376 LTP + 2.6565 LIE - 0.0008 LTL (12.17)* (2.81)" (4.78)* (0.031

- 2 R = 0.9148, F = 43.95*

Beaides, the results of determinants of impact of the

determinant of personal income taxation on income

distribution for the period 1974-75 to 1988-89 are presented

below:

LG = - 0.8283 + 0.7734 LTP + 1.5408 LIE + 0.1796 LTL (4.66)* (8.43)* ( 2 . 0 7 I X * 1 2 . 3 2 ) * *

The results of the coefficient of determinants of the

impact of personal income taxation on income distribution

coefficient for the year 1962-63 to 1974-75 and 1974-75 to

1988-89 are in the expected direction. But the degree of

their influence on income distribution differed during the

two phases. The degree of influence of t a x progressivity on

income distribution was 0.3376 and 0.7734 during the first

and second phases respectively. This is due to the fact

that during the first phase tax progreasivity was higher

than second phase (see table 5.3). Higher tax progreasivity

generally leads to larger amount of evasion and this may be

responsible for differencee in the degree of impact of tax

progressivity on income distribution during the two phaees.

The degree of influence of income inequality on income

distribution due to personal income taxation is 2,6565 and

1.5408 during the first and second phases respectively.

During the first phase the pre-tax income inequality is

higher than the second phase (see table 5.4). Generally the

degree o f impact of personal income taxation on income

distribution will be higher, whenever there is a high degree

of pre-tax inequality in income distribution. This may be

the reason why the influence of pre-tax income inequality on

income distribution due to personal income t a x differed

during the two phases.

The tax level coefficient is insignificant in the first

phase and it ia also significant in the second phase.

During the first phase the tax level is relatively small

(0.058 to 0 . 0 9 2 ) compared to the second phase (0.1 to 0.23)

(See table 5.3). The tax level ia substantially higher

during the second phase and it varies significantly over the

years which may be due to a shift in the tax liability from

the lower income group to higher income groups. In terms of

number tax payers, the low income tax payers are larger than

higher income tax payers. Hence, this ahift from lower

income to higher income will popularise the government and

will help to woo the vote bank. ~ u t in the first phase this

type of populist policies did not exist due to stability of

the government.

In addition to the above, we formulated a null

hypothesis that the estimated determinants of the impact of

personal income taxation on income distribution equation are

stable against the alternative hypothesis that they are not

stable. For testing thia, we employed Chow test (1960) and

its resulta are presented in table 5.9. The 'F' value of

Chow test isr 3.32 and it is significant at five per cent

level. Hence, it can be concluded that the estimated

determinants of impact of personal income taxation on income

distribution equation are not stable during the two phases.

The possible reasons are, shift from socialistic to

liberalised, economic to populist policies and from

political stability to instability during the selected

phases.

Concluding Remarks

On the basis of the objectives of the study the

analysis of the present chapter was divided into four

categories, such as, burden of personal income taxation, tax

level and tax progressivity, redistributive impact of

personal income taxation on income distribution and

determinants of impact of personal income taxation on income

distribution.

The burden of a t a x may be estimated in two dimensions,

average and marginal. The present chapter revealed that the

average tax burden has been consistently increasing i.e.

from 0.1282 in 1962-63 to 0.1848 in 1988-89. However, the

group-wise estimates showed some variations. The results of

marginal burden across different income ranges, revealed

that aa the t a x payer moves from low to high income rangea,

the marginal tax burden is found increasing reasonably.

The redistributive impact of the personal income

taxation can be studied by the tax level and tax

progressivity. The tax level is represented by the weighted

average of the statutory marginal tax rates; tax

progreesivity on the other hand indicates the degree of

progression. The study proved that both tax level and tax

progressivity have a role in the distributive impact in

respect of personal income taxation in India. The study

also showed that the t a x level which was only 0.0613 in

1962-63 rose to 0.2287 in 1988-89; but the tax progressivity

roere from 0.3692 to 0.6494 during the same period. This

proves that the tax level acquired more important role,

while the tax progrerrsivity lost its vigour in bringing

about redistributive effect on income over the years in

India . The redistributive impact of a tax was measured using

concentration index of pre-tax and post-tax incomes, by

employing Gini coefficient. Since 1962-63 to 1988-89 the

personal income taxation proved to be a very effective

measure in bringing about redistribution of income in India.

Though there has been slight variation in the degree of

impact, the value greater than one shows the positive

impact during the period of the study.

In order to examine the impact of change from political

stability to instability after 1975, on the determinants of

impact of personal income taxation on income distribution

in India, the study period was divided into two phases i.e.,

1962-1975 and 1975-1989. The coefficient of determinants of

the impact of personal income taxation on income

distribution are in the expected direction. But the degree

o f their influence on income distribution differed during

the two phases. The influence of tax progressivity on income

distribution was 0.3376 and 0.7734 during the first and

second phases respectively. This is due to the fact that

during the first phase the tax progressivity was higher than

the second phase. Higher tax progressivity leads to larger

amount of evasion and hence the degree of influence of tax

progressivity on income distribution is lower in the first

phase than in the second. The influence of income

inequality on income distribution due to personal income

taxation is 2.6565 and 1.54048 during the two phase8

respectively. During the first phaae the pre-tax income

inequality is higher than the second phase. Whenever there

is a high degree of pra-tax inequality in income

distribution, the degree of impact o f personal income

taxation on income distribution will also be higher. Thus

the reaulta showed that the impact of inequality of pre-tax

income on income distribution was higher in the first phase

compared to the second phase.

Similarly, the tax level coefficient ir~ insignificant

in the first phase, but it is significant in the second

phase. This is due to the fact that there is a clear shift

in the tax liability from the lower income groups to higher

income groups, when we move from the first phase to the

second pharre. In terms of number of t a x payers, the low

income t a x payers are larger than higher income tax payers.

Hence, this shift of t a x burden from lower income to higher

income will papulariae the government and will help to woo

the vote bank. But in the first phase this type of populist

policiee did not exist due to the stability of the

government. Besides, Chow test results also justifies the

above findings.

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TABLE 5.2

MARGINAL BURDEN OF PERSONAL INCOME TAX ACROSS SELECTED INCOME RANGES

................................................................ Year Upto R s . 2 0 , 0 0 0 R s . 5 0 , 0 0 0 Above

R s . 20 ,000 t o t o R s . 1 , 0 0 , 0 0 0 R s . 5 0 , 0 0 0 R s . 1 , 0 0 , 0 0 0

................................................................ 1962-63 0 .0401 0 .2480 0 . 5 7 8 9 0 . 7 7 9 1 1963-64 0.0387 0 .2538 0 .5797 0 .7602 1964-65 0 .0441 0 .2473 0 .5565 0 .7539 1965-66 0 .0479 0 .2478 0 .5224 0 . 7 3 9 2 1966-67 0 .0509 0 .2485 0.5017 0 .7300 1967-68 0 .0533 0 .2552 0.5126 0 . 6 9 3 5 1968-69 0.0555 0 .2567 0.5116 0 .6674 1969-70 0 .0567 0 .2598 0.51.71 0 . 6 7 4 3 1970-71 0.0598 0 .2627 0.5439 0 . 6 9 8 1 1971-72 0 .0624 0 , 2 6 5 3 0 .5659 0 . 7 1 3 7 1972-73 0 .0642 0 .2912 0.5786 0 .8443 1973-74 0 .0643 0 .2950 0 .6078 0 . 8 5 5 1 1974-75 0 , 0 6 4 3 0 .3065 0 .6313 0 .8678 1975-76 0.0610 0 .3015 0 .6170 0 .8261 1976-77 0 .0665 0 .2958 0 .4982 0 . 6 7 8 5 1977-78 0 .0612 0 .2774 0 .5346 0 . 7 6 7 1 1978-79 0.0736 0 .2714 0 .5293 0 .7269 1979-80 0.0740 0 .4381 0 .2922 0 .6740 1980-81 0 .0831 0 .2930 0 .5019 0 .6678 1981-82 0 .0664 0 .3008 0 .5828 0.6482 1982-83 0 .0874 0 .2960 0 .4793 0 .6800 1983-84 0.0724 0 . 2 9 9 1 0 .5033 0 . 6 3 1 1 1984-85 0.0274 0 . 3 0 2 3 0 .4439 0 .5755 1985-86 0 .0119 0 .2777 0 .3490 . 0 .4722 1986-87 0 .0112 0 .2797 0 .3522 0 .4756 1987-88 0 .0116 0 .2804 0 . 3 7 5 4 0 .4967 1988-89 0 .0206 0 .2403 0 .3212 0 .4610 1___-1-______________--- - - - - - - - I I - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

TABLE 5.3

RESULTS OF TAX LEVEL AND TAX PROGRESSIVITY OF PERSONAL INCOME TAX

...................................................... Year Tax Level Tax Progressivity ...................................................... 1962-63 0 .0613 0 .3692 1963-64 0 .0577 0 .4528 1964-65 0.0598 0 .6248 1965-66 0 .0655 0 . 6 3 2 4 1966-67 0 .0701 0 .6494 1967-68 0 .0748 0 . 3 6 9 5 1968-69 0.0793 0 . 5 6 0 4 1969-70 0 .0818 0 . 5 2 0 8 1970-71 0.0875 0 . 4 4 7 1 1971-72 0 .0927 0 .4077 1972-73 0 .0881 0 .4555 1973-74 0 .0895 0 . 4 4 4 3 1974-75 0 .0915 0 .4316 1975-76 0 .0926 0 . 4 4 9 9 1976-77 0 .1050 0 .3916 1977-78 0 .1001 0 . 4 1 2 4 1978-79 0 .1248 0 .3958 1979-80 0.1.271 0 .3370 1980-81 0 .1471 0 .3395 1981-82 0 .1408 0 .0599 1982-83 0 .1660 0 .3219 1983-84 0 .1818 0 .3211 1984-85 0.1957 0 .3461 1985-86 0 .2131 0 .3434 1986-87 0 .2219 0 .3268 1987-88 0 .2319 0 .3190 1988-89 0 .2287 0 . 3 0 3 1 _ _ _ _ _______________-----------------------------------

TABLE 5 . 4

RESULTS OF GINI-COEFFICIENT OF INCOME DISTRIBUTION BEFORE AND AFTER PERSONAL INCOME TAXATION

............................................................ Year G 1 G2 G 1 4 2 G1/G2 ............................................................ 1962-63 0 . 4 1 6 9 0.3626 0 . 0 5 4 3 1 . 1 4 9 8 1963-64 0 .3969 0.3347 0 .0622 1 . I 8 5 8 1964-65 0 .4118 0 .3288 0 . 0 8 3 0 1 . 2 5 2 4 1965-66 0 .4118 0.3208 0 . 0 9 1 0 1 . 2 8 3 8 1966-67 0 .4119 0.3128 0.0993. 1 , 3 1 6 8 1967-68 0 .4081 0.3474 0 . 0 6 0 7 1 . 1 7 4 7 1968-69 0 .3678 0.2786 0 . 0 8 9 2 1 . 3 2 0 2 1969-70 0 .4317 0.3475 0 . 0 8 4 2 1 . 2 4 2 3 1 9 7 0 - 7 1 0 .4087 0 .3313 0 .0774 1 . 2 3 3 6 1971-72 0 . 3 8 9 6 0 .3151 0 . 0 7 4 5 1 . 2 3 6 4 1972-73 0 .3693 0.2870 0 . 0 8 2 3 1 . 2 8 6 8 1973-74 0 .3579 0.2790 0 . 0 7 8 9 1 . 2 8 2 8 1974-75 0 .3465 0 . 2 7 1 1 0 .0754 1 . 2 7 8 1 1975-76 0 .3397 0 .2648 0 .0749 1 . 2 8 2 9 1976-77 0 . 3 5 2 8 0.2820 0.0708 1 . 2 5 1 1 1977-78 0 .3242 0 .2537 0 . 0 7 0 5 1 . 2 7 7 9 1978-79 0 .3078 0 . 2 3 1 9 0.0759 1 . 3 2 7 3 1979-80 0 . 2 8 9 3 0 .2242 0 . 0 6 5 1 1 . 2 9 0 4 1 9 8 0 - 8 1 0 . 3 1 0 1 0 .2346 0 . 0 7 5 5 1 . 3 2 1 6 1981-82 0 .2254 0 . 2 1 2 6 0.0128 1 . 0 6 0 2 1982-83 0 . 2 8 2 3 0 . 2 1 3 2 0 . 0 6 9 1 1 . 3 2 4 1 1983-84 0 .2948 0 .2166 0 .0782 1 . 3 6 1 0 1984-85 0 , 2 6 6 7 0 . 1 9 2 6 0 .0741 1 . 3 8 4 7 1985-86 0 .2826 0.21.53 0 .0673 1 . 3 1 2 6 1986-87 0 . 3 0 4 3 0 . 2 3 3 5 0 .0708 1 . 3 0 3 2 1987-88 0 . 3 2 0 1 0 . 2 4 2 6 0 .0775 1 . 3 1 9 5 1988-89 0 . 3 0 9 2 0 . 2 4 0 5 0 .0687 1 . 2 8 5 7 __-____________-___----------------------------------------- Note: GI = Gini coefficient of income distribution before

tax.

G2 = Gini coefficient of income distribution after tax.

TABLE 5 . 5

SIMPLE CORRELATION MATRIX BETWEEN DETERMINANTS AND IMPACT OF PERSONAL INCOME TAX ON INCOME DISTRIBUTION DURING 1962-63 TO 1 9 8 8 - 8 9

............................................................ LG LTP LPL LIE

LG 1 . 0 0 0 0 LTP 0 . 9 2 3 4 1 . 0 0 0 0 LPL - 0 . 0 6 3 5 - 0 . 3 1 8 0 1 . 0 0 0 0 LIE 0 . 7 4 4 7 0 .4887 0 .3390 1 . 0 0 0 0 _--_--------------------------------------------------------

TABLE 5 .6

SIMPLE CORRELATION MATRIX BETWEEN DETERMINANTS AND IMPACT OF PERSONAL INCOME TAX ON INCOME DISTRIBUTION DURING 1962-63 TO 1974-75

LG LTP LIE LTL LG 1 . 0 0 0 0 LTP 0 . 8 3 9 7 L.0000 LIE 0 .9252 0 .6872 1 . 0 0 0 0 LTL 0 .1036 -0 .1831 0 . 2 6 6 7 1 . 0 0 0 0

TABLE 5.7

SIMPLE CORRELATION MATRIX BETWEEN DETERMINANTS AND IMPACT OF PERSONAL INCOME TAX ON INCOME DISTRIBUTION DURING 1975-76 TO 1 9 8 8 - 8 9

............................................................ LG LTP LIE LTL

LG 1 . 0 0 0 0 LTP 0 . 9 6 9 4 1 . 0 0 0 0 LIE 0 . 9 2 6 2 0 .8458 1 . 0 0 0 0 LTL 0 .0885 -0 .1163 0.2855 1 . 0 0 0 0 ............................................................

TABLE 5.8

DETERMINANTS OF IMPACT OF PERSONAL INCOME TAX ON INCOME DISTRIBUTION DURING 1962-63 TO 1988-89

Equation-) Equation-1 Equation-2 Variable ............................................................ Constant -1.0772 -1.1605

(-15.20)* (-29.43)*

LTP

LTL

L I E

F 235.4* 338.5* ............................................................ Note: Parenthesis shows ' T ' value.

* Significant at one per cent level.

TABLE 5.9

CHOW TEST RESULTS

RSS RSS RSS n -n - 2K F Inference P 1 2 1 2

0.0193886 0.004311 0.007096 19 3 . 3 2 V h e estimated equation is not stable.

Note: *Significant at five per cent level.