Historically, there have been two main approaches to measuring tax progressivity: examining the progressivity of a tax structure; and examining the progressivity of taxes paid. Musgrave and Thin (1948) distinguished these as “structural progressivity” and “effective progressivity” measures. A third, more recent, concept is “progressive capacity” which captures elements of both structural and effective progressivity.

“Structural progressivity” focuses purely on the rate structure of an income tax, and typically produces “local” progressivity metrics (i.e., measures of progressivity at different points along the income distribution). A strength of this approach is that metrics are easy to compute and require no information beyond the underlying tax rules. However, this is a cost also: in addition to producing only local measures of progressivity, the approach entirely ignores the underlying income distribution.

In contrast, “effective progressivity” considers the interaction of both the tax schedule and the underlying income distribution, and typically produces “global” progressivity metrics (i.e., a single figure assessing the progressivity of the tax in question). Effective progressivity arguably provides a far more complete picture of the progressive impact of a tax because it is based on the actual tax liabilities of different households. For example, it is inconsequential to apply a very high marginal tax rate on a particular income range if there are no taxpayers actually in that income range. Effective progressivity calculations can potentially be undertaken for personal income taxes (PIT), social security contributions (SSC), value-added taxes (VAT) and excise taxes (including health and environmentally related taxes). The key drawback of the effective progressivity approach is that it is highly resource and data intensive. It requires information on both the tax system and on the underlying distribution of income (ideally microdata), and presents various challenges associated with data quality.

“Progressive capacity” is a type of hybrid approach, producing global metrics of progressivity of income taxes, but attempting to abstract away from the underlying pre-tax income distribution to focus on the tax structure. This approach may be particularly useful for cross-country comparison where the analyst is interested purely in comparing tax rate structures. The approach essentially looks to model the different tax schedules of countries using a common income distribution. A drawback of the approach is that the progressive capacity metrics, and consequent country rankings, are not necessarily invariant to the chosen “base” income distribution. However, recent papers have looked to address this base sensitivity problem, though they rely on strong assumptions.

This paper has examined in detail the merits of different progressivity metrics under each of these three approaches, finding strengths and weaknesses in each approach. An overarching finding is that, due to the various data and other analytical limitations, detailed measurement of the _degree_ of progressivity is limited largely to the PIT, and to a lesser extent, VAT and excise taxes. These taxes, and particularly the PIT, have consequently been the main focus of the paper. However, because of the need to provide an assessment for IDA countries of the progressivity of the entire tax system, the paper has also illustrated how aggregate tax revenue data – which is available for a larger number of countries in a timely manner – can be used to assess the likely degree of progressivity of tax systems in IDA countries.

Given the varying strengths and weaknesses of different approaches, a suite of metrics is proposed to assess tax progressivity in IDA countries over FY23-25. First, aggregate tax revenue-based metrics would be relied upon to provide a basic assessment of the progressivity of the overall tax system. These metrics assess the degree of reliance of countries on direct taxes – on the basis that these are likely to be the predominant sources of progressivity in tax systems. The degree of progressivity of the PIT – where 33