Income Inequality Before and After Taxes and Transfers: Empirical Trends

Figures 1.1 and 1.2 show levels and time trends of income inequality before and after taxes and transfers between 1985 and 2013. Figure 1.1 displays the development of the Gini coefficient before taxes and transfers. The solid line reveals that the mean Gini coefficient before taxes and transfers has increased substantially in core OECD member states over the past three decades, rising by almost 7 points on a scale that potentially varies between 0 and 100. The three remaining lines show that this upward trend is pronounced across all typical examples of social democratic, liberal, and conservative welfare regimes (Esping-Andersen 1990), that is, Sweden, the United States (US), and Germany. While the Swedish Gini coefficient fluctuates much more than the coefficient of the US and Germany, it shares their pronounced trends towards higher inequality of gross incomes. Interestingly, the German distribution of incomes before taxes and transfers resembles to a strikingly large degree the pattern of the US both in terms of level and direction of change, which means that the tale of ‘Social Europe vs. Liberal America’ (Pontusson 2005) mainly holds after redistribution has occurred. In the US, increasing inequality and its accompanying debate are particularly driven by shifts from the middle to the richest income strata (Gornick and Jantti 2013), while the corresponding German development shows an increase in poverty and thus the falling behind of the lowest deciles.

Gini coefficient before taxes and transfers, 1985-2013. Data source

Fig. 1.1 Gini coefficient before taxes and transfers, 1985-2013. Data source: Solt (2014)

Figure 1.2 demonstrates that the rising disparities in incomes before taxes and transfers have translated into higher overall net inequality across advanced economies, although the slope is considerably less steep than in Fig. 1.1. Sweden, Germany and the US follow this overall upward trend, yet specific national patterns emerge to a far larger degree after redistribution of income through both taxation and transfers through social policies. While Sweden shows a marked increase in its Gini coefficient comparable to the US, the considerably more equal starting position is matched by a still relatively equal income distribution in 2013. Germany exhibits an upward, but comparatively moderate, change over time and keeps its rather average Gini coefficient slightly below the OECD mean. The trend depicted is followed by the vast majority of advanced economies: 20 of 22 OECD countries analyzed (OECD 2015, 24) display increased net inequality between 1985 and 2013, while only Turkey and Greece show a slight decrease in their nevertheless high Gini coefficient scores after taxes and transfers. While incomes are already quite unequally distributed, wealth accumulates in an even more concentrated fashion (Piketty 2014).

ficient after taxes and transfers, 1985-2013. Data source

Fig. 1.2 ficient after taxes and transfers, 1985-2013. Data source:

Solt (2014)

What does this overview reveal about the redistributive power of social policy? Have welfare states been able to contain the push towards income inequality through redistribution? Both optimistic and pessimistic readings of the empirical evidence are possible. In defence of the welfare state, we see that taxes and transfers have a larger equalizing capacity than before, cushioning a large share of the increased gross differences in incomes. However, the data also show that the welfare state is fighting—and losing—an uphill battle, failing to keep net inequality in check. Furthermore, the design of the welfare state itself shapes and partly exacerbates existing inequalities, which will be elaborated in the remainder of this volume. Undesirable consequences of rising disparities and intrinsic concerns about inequality are discussed in the following section.

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