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What a difference a day makes: inequality and the tax and benefit system from a long-run perspective

Abstract

Most analyses of inequality and tax and benefit reforms are based on measures of individuals’ circumstances at a point in time. But strong age-profiles in earnings, among other characteristics that the tax and benefit system conditions upon, combined with individuals’ ability to transfer resources across time suggests that measuring circumstances over longer horizons may lead to a very different picture. In this article, we consider how our impression of inequality and the tax and benefit system changes when the horizon under consideration is extended. We show that inequality is lower, redistribution less extensive, and benefit receipt far more widespread from a longer-run perspective. The choice of accounting period can also lead to a very different assessment of the distributional impact of policy reforms. Our results show the importance of policymakers explicitly considering what it is they are trying to achieve through redistribution: the alleviation of short-run hardship or the reduction of lifetime inequality. While there may be good reasons to pursue both objectives, the group of people affected and the appropriate policy response will differ depending on which is prioritized.

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Acknowledgments

The authors gratefully acknowledge funding from the Nuffield Foundation (OPD/40976), the European Research Council (reference ERC-2010-AdG-269440-WSCWTBDS) and the ESRC Center for the Microeconomic Analysis of Public Policy based at the Institute for Fiscal (RES-544-28-5001, ES/M010147/1). The British Household Panel Survey (BHPS) is produced by the ESRC UK Longitudinal Studies Center, together with the Institute for Social and Economic Research at the University of Essex. Data for the BHPS were supplied by the UK Data Service. The BHPS is also crown copyright material and reproduced with the permission of the Controller of HMSO and the Queen’s Printer for Scotland. The authors thank Peter Levell for assistance with the BHPS, and Carl Emmerson, Andrew Hood, Paul Johnson and Cormac O’Dea for comments on earlier drafts. All errors remain the responsibility of the authors.

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Correspondence to Barra Roantree.

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Roantree, B., Shaw, J. What a difference a day makes: inequality and the tax and benefit system from a long-run perspective. J Econ Inequal 16, 23–40 (2018). https://doi.org/10.1007/s10888-017-9362-x

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Keywords

  • Inequality
  • Measuring living standards
  • Redistribution