How Do Different Tax Policies Affect Tax Relief Outcomes?
How Do Different Tax Policies Affect Tax Relief Outcomes?
We next examine how different tax policies affect the tax relief outcomes. Let us depict the tax relief results for the baseline, baseline plus consumption tax relief, and base income tax relief scenarios. Overall, the same effect is observed for all three scenarios. The more conservative tax relief measure reduces poverty more. Therefore, an increase in the share of the poorest households reduces poverty by a larger extent. In contrast, the consumption tax relief has the opposite effect. Although the percentage of the poor household in the baseline measure is small, the percentage of poor households in the consumption tax relief measure is relatively high. The results for this tax measure suggest that a tax policy that raises household income inequality tends to increase poverty among the poorest households. This result is similar to the results for the income tax measure. The results for the consumption tax relief measure are similar to the results for the income tax measure. However, the effect of the consumption tax measure is larger than the effect of the income tax measure. The consumption tax relief reduces the percentage of poor households in the lower income category as well as the percentage of the poor households in the higher income category. In contrast, the tax relief measures have little effect on the percentage of the poor in the middle income category (for more detailed results, see Table A1). Both the income tax and the consumption tax relief measures reduce the share of the middle income category of poor households, but the consumption tax relief is much more effective in this respect than the income tax measure. This result suggests that households with a low income might be slightly less affected by tax measures targeting the rich. For example, a tax policy that increases income inequality is less likely to hit low-income households than a policy that increases income equality. We also examine how the proposed changes in tax policies can affect poverty. The current policy has very little effect on the share of poor households in Norway. Both the measures to increase tax revenues (especially the income tax increase) and the measures to reduce the consumption tax are expected to increase the share of poor households. The increase in income taxes is expected to reduce poverty most for households with an income between 18,000 and 40,000 NOK (about 17,700 to 34,700 Euro). The lower-income households are affected slightly less by the income tax increase. If the income tax is increased to 25 percent, the income level at which the increase in poverty is introduced is the highest, namely 60,000 NOK. Thus, the upper quintile would have a slightly larger share of poor households than the upper quartile today. The middle and lower quintiles would have a somewhat smaller share of poor households than the present (which is expected to reach 0.2 percent). Income distribution is defined as the share of total income that is generated by the bottom 20 percent, the middle 60 percent, and the upper 20 percent of the income distribution. Although Norway has one of the lowest income taxes in the OECD, it still ranks among the countries with the highest proportion of poor households. The share of poor households in the OECD decreased from 17 percent in 1990 to 13.5 percent in 2001 (as measured by OECD as a whole) and 11.5 percent in Norway (as measured by the lower income quintiles). However, during this period of relatively strong growth, the share of poor households increased to 17.4 percent in the OECD and to 17.1 percent in Norway. If the wealth tax is eliminated, the tax gap between the rich and poor households increases. The higher wealth tax in Norway is equivalent to a lower tax rate. This leads to a higher incidence of wealth tax. In other words, households that have the same level of wealth have to pay more in wealth tax. Therefore, the difference between rich and poor households increases. If the wealth tax is eliminated, the difference between rich and poor households is smallest in the lowest quintile of the wealth distribution (see Figure 5). By comparison, in the lower income quintiles of the wealth distribution, the difference between rich and poor households is smallest if the wealth tax is kept at 100 percent. Therefore, increasing the wealth tax to 100 percent would be equivalent to increasing the lowest income quintile’s income tax rate from 40 percent to 45 percent. It is also noticeable that the income tax gap between the poor and rich households remains relatively constant over time (see Figure 6). The income tax gap has remained constant since 2001. There is a relatively small reduction in the income tax gap between the rich and the poor between 2000 and 2004. As mentioned, since 2000, the income tax rate has been reduced by 2 percentage points. It is interesting to see how this rate reduction affects the income tax gap between the rich and poor. Over this period of time, there is a slight reduction in the income tax gap between the rich and the poor (see Figure 7). The income tax gap is largest in the highest income quintile in 2000. After the tax reduction in 2000, the income tax gap is highest in the lowest quintile in 2004. This means that there is an inequality in wealth redistribution from 2000 until 2004. There is a large increase in the income tax gap between the rich and poor after 2004. This is due to the increase in the wealth tax from 10 percent in 2000 to 100 percent in 2012. It is noticeable that if the wealth tax increases in 2009 to only 20 percent, the income tax gap between the rich and the poor is still relatively small.
