The Inconsistency Between Measurement and Policy Instruments in Family Income Taxation

There is an inconsistency between the way income tax progressivity is measured and the policy instruments typically used by the income tax authorities. This inconsistency leads to violation of Feldstein's principle of horizontal equity and causes unintentional reranking among families of different sizes. Implications are considered. In particular, we provide a methodology for measuring the magnitude of the unintentional reranking in terms of forgone redistribution, and apply it to Israeli data.