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Income Inequality and Fiscal Redistribution in 31 Countries After the Crisis

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Abstract

In this paper, we analyze fiscal redistribution after the Great Recession. Are welfare states still effective in reducing income inequality? We use recent microdata from the Luxembourg Income Study to examine redistribution from transfers and income taxes, and the several underlying social programs that drive the changes in 31 countries. On average, we find that social transfers and income taxes reduce the Gini by 31%. In most countries, pensions are a dominant factor. After performing a number of sensitivity analyses, we conclude that the redistributive impact of the welfare state is still substantial.

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Fig. 1

Source: Database Wang and Caminada (2017) based on LIS, and own calculations

Fig. 2

Source: Database Wang and Caminada (2017) based on LIS, and own calculations

Fig. 3

Source: Database Wang and Caminada (2017) based on LIS, and own calculations

Fig. 4

Source: Database Wang and Caminada (2017) based on LIS, and own calculations

Fig. 5

Source: Database Wang and Caminada (2017) based on LIS, and own calculations

Fig. 6

Source: Database Wang and Caminada (2017) based on LIS, and own calculations

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Notes

  1. Among others Kuznets (1955), Nielsen and Alderson (1997), Gustafsson and Johansson (1999), Chevan and Stokes (2000), Atkinson (2015) and Piketty (2014).

  2. Among others Danziger et al. (1981), Gottschalk and Smeeding (1997, 2000), Atkinson and Brandolini (2001), Smeeding (2000, 2004), Atkinson (2003), Brandolini and Smeeding (2007), Belfield et al. (2017), Caminada and Goudswaard (2001) and Wang et al. (2012, 2014).

  3. Among others Plotnick (1984), Ferrarini and Nelson (2003), Kristjánsson (2011), Fuest et al. (2010), Jesuit and Mahler (2010, 2017), Causa and Hermansen (2017), Caminada and Goudswaard (2001) and Wang et al. (2012, 2014).

  4. Among others, see Atkinson et al. (2001), Gustafsson and Johansson (1999) and Lambert et al. (2010).

  5. Among others, Atkinson (2003), Atkinson and Brandolini (2001), Brandolini and Smeeding (2007), Gottschalk and Smeeding (1997, 2000) and Smeeding (2000, 2004).

  6. The distinctive feature and value-added of LIS is the access it provides to a set of harmonized micro data files supplied by participating statistical agencies at the country level (Ravallion (2015: p. 529): Harmonization of income data increases quality and comparability across nations and across time; see Smeeding and Latner (2015) for a critical review of three other popular data sets which summarize inequality across countries and years (World Development Indicators (‘WDI’)/‘PovcalNet’ and ‘All the Ginis’). Following Ravallion (2015: p. 529): There are pros and cons of each source. While World Income Inequality Database (WIID) is the largest (by far) it is probably the least methodologically consistent internally, while LIS is the smallest but most consistent. PovcalNet and the WDI are somewhere between the two.

  7. The redistributive effect of taxes can not be calculated from net datasets of LIS, because gross income equals disposable income. Moreover, mixed datasets in LIS are a special case in which total income can be gross of income taxes but net of contributions, or vice versa, causing a bias in the calculation of the redistributive effect of ‘taxes’. As a result, we do not take into account the following LIS countries: Belgium, China, Colombia, Egypt, France, Georgia, Hungary, Italy, Mexico, Paraguay, Russia, Serbia, Slovenia and Uruguay. Moreover, we exclude Romania, because the latest data year available refers to 1997.

  8. In the LIS classification employers’ social contributions are included in the trajectory from market income to disposable income. However, Guillaud et al (2017) show that employers’ social contributions are (arbitrarily) excluded in some countries.

  9. Among others, see Atkinson (2003), Atkinson and Brandolini (2001), Brandolini and Smeeding (2007, 2009) and Gottschalk and Smeeding (1997).

  10. For this reason Tony Atkinson has advised to take the total population into account in this analysis (LIS Summer Workshop 2012).

  11. This analysis excludes countries with little or no information on specific social benefits, i.e., when the redistributive effect of the category Other transfers amounts over 25% of total fiscal redistribution. This is the case for Canada, Dominican Republic, Japan, South Korea, Sweden and Taiwan.

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Authors and Affiliations

  1. Leiden University, Leiden, Netherlands

    Koen Caminada, Kees Goudswaard, Chen Wang & Jinxian Wang

  2. Netspar, Tilburg, Netherlands

    Koen Caminada & Kees Goudswaard

  3. Shanghai University of Finance and Economics, Shanghai, China

    Chen Wang

  4. Central South University, Changsha, China

    Jinxian Wang

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  1. Koen Caminada
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  2. Kees Goudswaard
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  4. Jinxian Wang
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Correspondence to Jinxian Wang.

Additional information

This study is part of the research program Reform of Social Legislation of Leiden University. Financial support of Instituut GAK, China National Foundation of Natural Sciences (Project 71703088) and Shanghai Pujiang Program (Project 17PJC045) are gratefully acknowledged. We thank the LIS Cross-National Data Center in Luxembourg for permission to post the Budget Incidence Fiscal Redistribution Dataset on Income Inequality at our website (Leiden University/LLS/Economics/Data).

We appreciate all (anonymous) referees for their useful comments and we have revisved our paper based on their suggestions.

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Caminada, K., Goudswaard, K., Wang, C. et al. Income Inequality and Fiscal Redistribution in 31 Countries After the Crisis. Comp Econ Stud 61, 119–148 (2019). https://doi.org/10.1057/s41294-018-0079-z

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