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Can we reduce income inequality in OECD countries?

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Abstract

The public debate about inequality has generated a sense of gloom and doom—that high levels of inequality are inevitable and that little can be done. The aim of this paper is to inject a more optimistic note. I argue that there have been periods in the past when income inequality was reduced and we can learn from these, that the textbook story of the causes of rising wage inequality—globalisation and technological change—has a more optimistic interpretation; and that, whereas wages are a major part of household incomes, but there are other important determinants where it is possible to take action to reduce inequality. The paper ends by outlining four “old” measures to reduce inequality, based on the lessons from the post-war decades in Europe, and four “new” measures suggested by the analysis of today’s economics of inequality.

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Notes

  1. A gross income of Y becomes a net income of (1 − t)Y + A, where t is the tax rate and A is the benefit paid to everyone (this can be thought of as the value of the personal tax allowance). Since A is the same for all, the Gini for disposable income is (1 − t) times the Gini for market income (Y) divided by the ratio of average disposable income to average market income. Then, if government spending on goods and services (health, education, defence, etc.) absorbs 20 % of tax revenue, the latter ratio is equal to 80 %. Suppose further that the Gini coefficient of market incomes is 50 %. The reduction in the Gini for disposable income from an increase ∆t in the tax rate is then 0.5 times ∆t divided by 0.8.

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Correspondence to Anthony B. Atkinson.

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A (considerably) revised version of a plenary lecture given at the Nationalökonomische Gesellschaft/Austrian Economic Association Annual Meeting in Vienna, May 2014. I am most grateful to Wilfried Altzinger and his colleagues for the invitation and for their warm hospitality. The paper is based on research carried out in the Inequality Group that forms part of the EMoD programme supported by INET at the Oxford Martin School. It draws on joint recent work with Salvatore Morelli on the Chartbook of Economic Inequality and with Facundo Alvaredo on the World Top Incomes Database.

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Atkinson, A.B. Can we reduce income inequality in OECD countries?. Empirica 42, 211–223 (2015). https://doi.org/10.1007/s10663-015-9288-0

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  • DOI: https://doi.org/10.1007/s10663-015-9288-0

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