Caminada, Koen and Goudswaard, Kees and Wang, Chen (2012): Disentangling income inequality and the redistributive effect of taxes and transfers in 20 LIS countries over time.
Download (742kB) | Preview
In most OECD countries the gap between rich and poor has widened over the past decades. This paper analyzes whether and to what extent taxes and social transfers have contributed to this trend. Has the redistributive power of different social programs changed over time? The paper contributes to the literature by disentangling several parts of fiscal redistribution in a comparative setting. We use micro-data from the Luxembourg Income Study to examine household market inequality, redistribution from transfers and taxes, and the underlying social programs that drive the changes, for 20 countries from the mid-1980s to mid-2000s. The contribution of each program is estimated using a sequential accounting budget incidence decomposition technique. The aim of this paper is to offer detailed information on the redistributive impact of social transfer programs. We focus on changes in fiscal redistribution of 13 different social programs and taxes. We observe a sizeable increase in primary household inequality in all 20 countries over the last 25 years (except Ireland). In most countries, the extent of redistribution has increased too. Tax-benefit systems have offset two-third of the average increase in primary income inequality, although they appear to have become less effective in doing so since the mid-1990s. We find that the public old age pensions and the survivors scheme attribute 60 percent to the increase of redistribution during the period 1985-2005 for a subset of countries considered (with full tax/benefit information). Social assistance accounts for 20 percent, and the benefits for sickness, disease, and disability account for around 13 percent of the total increase in redistribution. Other transfers (invalid career benefits, education benefits, child care cash benefits and other child and family benefits) account for 22 percent of the total increase in redistribution. On the contrary, taxes slowed down redistribution by 17 percent during 1985-2005.
|Item Type:||MPRA Paper|
|Original Title:||Disentangling income inequality and the redistributive effect of taxes and transfers in 20 LIS countries over time|
|English Title:||Disentangling income inequality and the redistributive effect of taxes and transfers in 20 LIS countries over time|
|Keywords:||welfare states, social income transfers, inequality, Gini coefficient, LIS|
|Subjects:||H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions
H - Public Economics > H5 - National Government Expenditures and Related Policies > H53 - Government Expenditures and Welfare Programs
I - Health, Education, and Welfare > I3 - Welfare and Poverty > I32 - Measurement and Analysis of Poverty
|Depositing User:||Chen Wang|
|Date Deposited:||01. Nov 2012 16:08|
|Last Modified:||12. Feb 2013 00:42|
Atkinson, A. B., L. Rainwater, and T.M. Smeeding (1995), ‘Income Distribution in OECD Countries: Evidence from the Luxembourg Income Study’, OECD Social Policy Studies 18, Paris.
Atkinson, A.B. (1996), ‘Seeking to Explain the Distribution of Income', in: J. Hills (ed.), New Inequalities, Cambridge University Press, Cambridge.
Atkinson, A.B. (2003), ‘Income Inequality in OECD Countries: Data and Explanations’, CESifo Economic Studies 49(4): 479-513.
Atkinson, A.B. and Brandolini, A. (2001), ‘Promise and Pitfalls in the Use of Secondary Data-Sets: Income Inequality in OECD Countries as a Case Study’, Journal of Economic Literature 39(3) (September): 771-800.
Blank, R.M. and A.S. Blinder (1986), ‘Macroeconomics, Income Distribution, and Poverty’, in: S. Danziger and D. Weinberg (eds.), Fighting Poverty: What Works and What Doesn’t, Cambridge, MA, Harvard University Press: 180-208.
Blank, R.M., D. Card, F. Levy and J.L. Medoff (1993), ‘Poverty, Income Distribution, and Growth: Are They Still Connected?’, Brookings Papers on Economic Activity 2: 285-339.
Blinder, A.S. and H.Y. Esaki (1978), ‘Macroeconomic Activity and Income Distribution in the Postwar United States’, The Review of Economics and Statistics 60: 604-609.
Brady, D. (2004), ‘The welfare state and relative poverty in rich western democracies, 1967-1997’, LIS Working Paper Series 390.
Brandolini, A. and T.M. Smeeding (2009), ‘Income Inequality in Richer and OECD Countries’, in: Salverda, W., B. Nolan and T.M. Smeeding (eds.), The Oxford Handbook of Economic Inequality, Oxford University Press.
Brandolini, A., and T.M. Smeeding (2007a), ‘Inequality Patterns in Western-Type Democracies: Cross-Country Differences and Time Changes’, LIS Working Paper Series 458.
Brandolini, A., and T.M. Smeeding (2007b), ‘Inequality: International Evidence’, in: S.N. Durlauf and L.E. Blume (eds.), The New Palgrave Dictionary of Economics, Basingstoke: Palgrave Macmillan: 1013-1021.
Caminada, C.L.J., and K.P. Goudswaard (2005), 'Are public and private social expenditures complementary?', International Advances in Economic Research 11(2): 175-189.
Caminada, K., and K.P. Goudswaard (2001), 'International Trends in Income Inequality and Social Policy', International Tax and Public Finance 8(4): 395-415.
Caminada, K., and K.P. Goudswaard (2002), ‘Income Distribution and Social Security in and OECD Perspective’, in: R. Sigg and C. Behrendt (eds.), Social Security in the Global Village, International Social Security Series, Volume 8, Transaction Publishers: New Brunswick/ Londen: 163-188.
Caminada, K., and K.P. Goudswaard (2009), 'Effectiveness of Poverty Reduction in the EU15. A Descriptive Analysis.', Poverty & Public Policy 1(2), Article 5: 1-51.
Caminada, K., and K.P. Goudswaard (2010), ‘How well is social expenditure targeted to the poor?', in: P. Saunders and R. Sainsbury (eds.), Social Security, Poverty and Social Exclusion in Rich and Poorer Countries, International Studies on Social Security, volume 16, Mortsel, Belgium: Intersentia: 97-112.
Caminada, K., K. Goudswaard and F. Koster (2012), 'Social income transfers and poverty: A cross-country analysis for OECD countries’, International Journal of Social Welfare 21(2): 115-126.
Chen, W.H., M. Föster and A. Llena-Nozal (2011), ‘Trends in Households Earnings Inequality: The Role of Changing Family Formation Practice’, in Divided We Stand: Why Inequality Keeps Rising, Paris: Organisation of Economic Co-operation and Development: 193-224.
Chevan, A. and R. Stokes (2000), ‘Growth in Family Income Inequality, 1970-1990: Industrial Restructuring and Demographic Change’, Demography 37:365-380.
Danziger, S., R. Haveman and R. Plotnick (1981), ‘How Income Transfer Programs Affect Work, Savings and Income Distribution: A Critical Assessment’, Journal of Economic Literature 19 (September): 975-1028.
Ervik, R. (1998), 'The Redistributive Aim of Social Policy. A Comparative Analysis of Taxes, Tax Expenditure Transfers and Direct Transfers in Eight Countries', LIS Working Paper Series 184.
Ferrarini, T., and K. Nelson (2003) ‘Taxation of Social Insurance and Redistribution: a Comparative Analysis of Ten Welfare States’, Journal of European Social Policy 13(1): 21–33.
Föster, M. (2000), 'Trend and Driving Factors in Income Distribution and Poverty in the OECD Area', Labour Market and Social Policy Occasional Papers no. 42, OECD, Paris.
Frick, J.R., F. Büchel, and P. Krause (2000), ‘Public transfers, income distribution, and poverty in Germany and the United States’ in: R. Hauser and I. Becker (eds.) The Personal Distribution of Income in an International Perspective, Berlin, Germany, Springer-Verlag: 176-204.
Fuest, C., J. Niehues, and A. Peichl (2010), ‘The Redistributive Effects of Tax Benefit Systems in the Enlarged EU’, Public Finance Review 38(4): 473-500.
Gillespie, W.I. (1965), 'Effects of Public Expenditures on the Distribution of Income' in: R. Musgrave (eds.), Essays in Fiscal Federalism, The Brookings Institution, Washington.
Gottschalk, P., and T.M. Smeeding (1997), ‘Cross-National Comparisons of Earnings and Income Inequality’, Journal of Economic Literature 35(2): 633-687.
Gottschalk, P., and T.M. Smeeding (1998), 'Empirical Evidence on Income Inequality in Industrialized Countries, LIS Working Paper Series 154 (revised), Luxembourg.
Gottschalk, P., and T.M. Smeeding (2000), ‘Empirical Evidence on Income Inequality in Industrialized Countries’, in: A.B. Atkinson and F. Bourguignon (eds.), Handbook of Income Distribution, Amsterdam: North-Holland, 261-308.
Gustafsson, B. and M. Johansson (1999), ‘In Search of Smoking Guns: What Makes Income Inequality Vary over Time in Different Countries?’, American Sociological Review 64: 585-605.
Harrison, B. and B. Bluestone (1988), The Great U-Turn: Corporate Restructuring and the Polarizing of America. NY: Basic Books.
Hauser, R. and I. Becker (1999), ‘Changes in the distribution of pre-government and post-government income in Germany 1973 – 1993’, in: R. Hauser and I. Becker (eds.), The Personal Distribution of Income in an International Perspective, Berlin: Springer-Verlag, 72-98.
Heisz, A. (2007), ‘Income Inequality and Redistribution in Canada: 1976 to 2004’, Analytical Studies Branch Research paper Series, No. 298.
Immervoll, H. and L. Richardson (2011), ‘Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades?’, OECD Social, Employment and Migration Working Papers, No. 122, OECD Publishing.
Immervoll, H., H. Levy, Ch. Lietz, D. Mantovani, C.O. Donoghue, H. Sutherland, and G. Verbist (2005), ‘Household incomes and redistribution in the European Union: Quantifying the equalising properties of taxes and benefits’, EUROMOD Working Papers EM9/05.
Kakwani, N. (1986), Analyzing Redistribution Policies: A Study Using Australian Data, Cambridge: Cambridge University Press.
Kakwani, N.C. (1977a), 'Measurement of Tax Progressivity: An International Comparison', Economic Journal 87:71-80.
Kakwani, N.C. (1977b), 'Applications of Lorenz Curves in Economic Analysis', Econometrica 45 (3):719-727.
Kammer, A., and J. Niehues (2011), ‘Fiscal Redistribution in Modern Welfare States. Dynamic Evidence from Germany and the United Kingdom’, paper presented at the 18th International Research Seminar of the Foundation for International Studies on Social Security, Sigtuna, Sweden.
Kenworthy, L., and J. Pontusson (2005), ‘Rising Inequality and the Politics of Redistribution in Affluent Countries’, Perspectives on Politics 3(3): 449-471
Kim, H. (2000a), ‘Anti-Poverty Effectiveness of Taxes and Income Transfers in Welfare States’, International Social Security Review 53(4): 105–129.
Kim, H. (2000b), ‘Do welfare states reduce poverty? A critical shortcoming in the standard analysis of the anti-poverty effect of welfare states’, LIS Working Paper Series 233.
Korpi, W., and J. Palme (1998), ‘The Paradox of Redistribution and Strategies of Equality: Welfare State Institutions, Inequality, and Poverty in the Western Countries’, American Sociological Review 63: 661-687.
Kristjánsson, A.S. (2011), ‘Governmental Income Redistribution in Iceland. Development and European Comparison’, paper presented at the 18th International Research Seminar of the Foundation for International Studies on Social Security, Sigtuna, Sweden.
Kuznets, S. (1955), ‘Economic Growth and Income Inequality’, American Economic Review 45: 1-28.
Lambert, P. J. (1993), The distribution and redistribution of income: A mathematical analysis, Manchester: Manchester University Press.
Lambert, P.J., R. Nesbakken, and T.O. Thoresen (2010), ‘On the Meaning and Measurement of Redistribution in Cross-Country Comparisons’, LIS Working Paper Series 532.
Lerman, R.I., and S. Yitzhaki (1985), ‘Income Inequality Effects by Income Source: A New Approach and Applications to the United States’, The Review of Economics and Statistics 67(1): 151-156.
Luxembourg Income Study (LIS) Database, http://www.lisdatacenter.org (multiple countries; microdata runs completed on 27 August 2012). Luxembourg: LIS.
Mahler, V.A., and D.K. Jesuit (2006), ‘Fiscal redistribution in the developed countries: new insights from the Luxembourg Income Study’, Socio-Economic Review 4: 483–511.
McCall, L. (2001), Complex Inequality: Gender, Class, and Race in the New Economy. NY: Routledge.
Mitchell, D. (1991), Income Transfers in Ten Welfare States, Aldershot: Avebury.
Mocan, N. (1999), ‘Structural Unemployment, Cyclical Unemployment, and Income Inequality’, The Review of Economics and Statistics 81: 122-134.
Morris, M. and B. Western (1999), ‘Inequality in Earnings at the Close of the Twentieth Century’, Annual Review of Sociology 25: 623-57.
Musgrave, R.A., and Tun Thin (1948), 'Income Tax Progression, 1929 48', Journal of Political Economy 56: 498 514.
Musgrave, R.A., K.E. Case, and H.B. Leonard (1974), 'The Distribution of Fiscal Burdens and Benefits', Public Finance Quarterly 2(July): 259 311.
Nielsen, F. and A.S. Alderson (1997), ‘The Kuznets Curve and the Great U-Turn: Patterns of Income Inequality in U.S. Counties, 1970-1990’, American Sociological Review 62: 12-33.
Nolan, B., and I. Marx (2009), ‘Economic Inequality, Poverty, and Social Exclusion’ in: W. Salverda, B. Nolan and T.M. Smeeding (eds.), The Oxford Handbook of Economic Inequality, New York: Oxford University Press: 315-341.
O’Higgins, M., G. Schmaus, and G. Stephenson (1990), ‘Income Distribution and Redistribution: A Microdata Analysis for Seven Countries’, in: T. Smeeding , M. O’Higgins and L. Rainwater (eds.), Poverty, Inequality, and Income Distribution in Comparative Perspective, Harvester Wheatsheaf, Hemel Hempstead.
OECD (2008), Growing unequal? Income distribution and Poverty in OECD Countries, Paris: OECD.
OECD (2011), Divided We Stand: Why Inequality Keeps Rising, Paris: OECD.
Palme, M. (1996), ‘Income Distribution Effects of the Swedish 1991 Tax Reform: An Analysis of a Microsimulation Using Generalized Kakwani Decomposition’, Journal of Policy Modeling18(4): 419-443.
Paul, S. (2004), ‘Income sources effects on inequality’, Journal of Development Economics 73: 435-451.
Plotnick, R. (1984) ‘The Redistributive Impact of Cash Transfers’, Public Finance Quarterly 12: 27–50.
Reynolds, M., and E. Smolensky (1977a), Public Expenditures, Taxes and the Distribution of Income: The United States 1950, 1961, 1970, Academic Press, New York.
Reynolds, M., and E. Smolensky (1977b), 'Post Fisc Distributions of Income 1950, 1961, and 1970', Public Finance Quarterly 5:419-438.
Ringen, S. (1991), 'Households, standard of living and inequality', Review of Income and Wealth 37:1-13.
Shorrocks, A.F. (1982), ‘Inequality decomposition by factor components’, Econometrica 50:193-211.
Smeeding T. (2008), ‘The LIS/LES Project: Overview and Recent Developments’’, LIS Working Paper Series 294.
Smeeding, T. (2000), 'Changing Income Inequality in OECD Countries: Updated Results from the Luxembourg Income Study (LIS)', in: R. Hauser and I. Becker (eds.) The Personal Distribution of Income in an International Perspective, Berlin, Germany, Springer-Verlag: 205-224.
Smeeding, T.M. (2004), ‘Twenty Years of Research in Income Inequality, Poverty and Redistribution in the Developed World: Introduction and Overview’, Socio-Economic Review 2: 149-163.
Smolensky, E., W. Hoyt, and S. Danziger (1987), 'A Critical Survey of Efforts to Measure Budget Incidence' in: H.M. van de Kar, B.L. Wolfe (eds.), The Relevance of Public Finance for Policy-Making, Proceedings IIFP Congress 1985, Detroit:165-179.
Stark, O., J. E. Taylor, and S. Yitzhaki (1986), ‘Remittances and inequality’, Economic Journal 96: 722-740.
Van Vliet, O., J. Been, K. Caminada and K. Goudswaard (2012), ‘Pension reform and income inequality among the elderly in 15 European countries’, International Journal of Social Welfare, DOI: 10.1111/j.1468-2397.2012.00873.x.
Wang, C., and K. Caminada (2011), ‘Disentangling Income Inequality and the Redistributive Effect of Social Transfers and Taxes in 36 LIS Countries’, LIS Working Paper Series 567.
Wang, C., K. Caminada and K. Goudswaard (2012), ‘The redistributive effect of social transfer programs and taxes: a decomposition across countries’, International Social Security Review 65(3): 27-48.
Whiteford (2010), ‘The Australian Tax-Transfer System: Architecture and Outcomes’, The Economic Record 86 (275): 528-544.
Whiteford, P. (2008), ‘How much redistribution do governments achieve? The role of cash transfers and household taxes, growing unequal: income distribution and poverty in OECD countries’, in: Growing unequal? Income distribution and poverty in OECD countries, Paris: Organisation of Economic Co-operation and Development: 97-121.