Artha Vijnana: Journal of The Gokhale Institute of Politics and Economics

Pawan K. Aggarwal ¹, D. K. Srivastava ²

Affiliations
1 Gokhale Institute of Politics and Economics, Pune 411004, IN
2 National Institute of Public Finance and Policy, New Delhi 110 067, IN

Abstract

The linear distance formula occupies a prominent position as an allocative criterion for revenue-sharing among State in India as well as internotionally. In India, the Tenth Finance Commission has preferred this criterion to other competing criteria and has given it a predominant weight. This poper analyses analytical properties of the alternative versions of the distance criterion. A generalised version of the distance formula has been developed and the alternative versions have been shown to be its special cases. Alternative criteria are compared in terms of their progressivity and equity. Some of the recent Finance Commissions in India have used an arbitrary adjustment in the distance criterion under political constraints. This politically constrained version does not satisfy the requirement of maintaining vertical equity consistently. An alternative, based on the general version, is proposed that Is progressive as well as satisfies equity. The distance criterion is also shown to be equivalent to a system of fiscal capacity equalisation grants under certain assumptions.

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Pawan K. Aggarwal

Abstract

The study proposes a new global measure of tax progressivity in terms of inequality indices of pre-tax income and tax defined on the basis of concept of equally distributed equivalent level of income. It is found invariant to tax scale. While the existing measures in this class are found more suitable as indicators of redistributive impact of the tax, the new measure seems more suitable as measure of tax prograssivity or graduation in the tax schedule. The new measure along with the average tax rate is found to help in understanding changes in redistributive impact of the tax. The study reveals the comparison of tax progressivity or redistribution impact over time or, across different tax schedules has to be associated with the measure of progressivity or the welfare function associated with the relevant inequality indices.

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