Measuring the Statistical Significance of Differences in Tax Progressivity and Income Inequality.

In applied tax and income distribution studies, the predominant practice Is to use the Lorenz curve and one or morn indexes derived from the Lorenz curve to describe the distributional effects of tax law changes. However where sample data are used, sampling variation is present. Observed distributional differences across alternative tax systems may, therefore, be attributable to sampling variability. This paper outlines and explains the methodology by which data underlying Lorenz curves can be used for Inferential rather than Just descriptive purposes. The methodology is demonstrated by applying it to evaluate the effect of the income tax system on income inequality and that of the earned income credit on overall progressivity and income inequality.