The common image of distributional effects of taxes and transfers is that they narrow the income gaps between people at different income levels. However, policies may reduce inequality by rearranging rankings as well. This paper presents a method for decomposing changes in the Gini coefficient into exclusive, exhaustive effects representing gapnarrowing and reranking components. We then explain and illustrate the relationship between these measures and various concepts of horizontal equity in the literature. The paper applies the decomposition by estimating the gap-narrowing and reranking effects of U.S. taxes and transfers in 1991.
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Lerman et al. (1995) studied this question.
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