Tax progressivity and social welfare with a continuum of inequality views

We develop a framework for analysing the loss of social welfare due to taxation, where tax progressivity and regressivity, measured by the Kakwani index, are given interpretation in terms of welfare gain and loss, respectively. Our framework generalises the framework of Kakwani and Son (J Econ Inequal 19:185–212, 2021), by taking account of the intermediate inequality views, a continuum of combinations of the relative view (equal relative change of all incomes does not change inequality) and the absolute view (equal absolute change of all incomes does not change inequality). The welfare loss of taxation is decomposed into three components, one being a generalised Kakwani index, which accommodates the intermediate inequality views. We show that for a progressive (regressive) tax, moving closer to the relative view reduces (increases) the importance of progressivity (regressivity) for the welfare impact of the tax. The perception of the importance of progressivity and regressivity is thus affected by the inequality view taken. The empirical application considers the welfare loss of taxation in Croatia.