Can Inequality Be Reformed?

Abstract

Three limitations in standard method measurement of income redistribution are considered: that redistribution is seen as a matter of global rather than marginal effects, that structural effects on the distribution of factor income are not accounted for, and that cross-section and life-cycle effects are conflated. Evidence from recent research is introduced. It is argued that standard method results are reasonably robust in spite of limitations in the methodology. A positive association in advanced industrial companies between tax/transfer policy and income inequality is argued to be a firmly established conclusion. This suggests both that if government wants to modify income inequality it has a tool for so doing in tax and transfer policy, and that if it should want to reshape transfers or taxes for other reasons it must expect there to be distributional consequences. Czech Sociological Review, 1996, Vol. 4, (No. 1: 19-28) Comparative research on income distribution in advanced industrial societies over the last ten to fifteen years has produced at least two findings which can now be characterised as firmly established. The first is that there are considerable differences between nations in the distribution of income. This has been demonstrated above all in the Luxembourg Income Study [Smeeding et al. 1990]. Before the co-ordinated LIS estimates there was uncertainty about this and the tendency was to emphasise similarity more than difference. It has also been shown in more limited comparisons, for example of the Nordic countries [Ringen 1986, 1991; Gustafsson and Uusitalo 1990a, 1990b; Ringen and Uusitalo 1992] and of Australia and New Zealand [Saunders, Stott and Hobbs 1991]. The second finding is that there have been considerable and systematic shifts within countries in income inequality over relatively short periods of time. Here I refer to studies by Jenkins [1991], Coulter et al. [1993], Atkinson [1993], and Goodman and Webb [1994] for Britain, to the works cited above for Finland, Sweden, Australia and New Zealand, to Ringen [1993] on the composition of household income in Norway, to Fritzell [1993] for a five-country comparison, and to official poverty estimates in Britain and the United States. Previously, the tendency was to regard income inequality as relatively stable over time and such changes as were observed as mainly fluctuations around a stable underlying trend. Through these findings, income inequality has become established as a sensitive indicator of social life. Whereas established conclusions have been reached on the descriptive facts, there is less agreement about what the relevant underlying pressures are, in particular: to what degree are transfer and tax policies a factor in accounting for variations in income inequality? The question is of obvious policy relevance, but there is also a more general relevance. There are strong theories, in particular in sociological writing, of an inherent *) Direct all correspondence to Stein Ringen, Department of Applied Social Studies and Social Research, University of Oxford, Wellington Square, Oxford 0X1 2ER, United Kingdom. 19 This content downloaded from 157.55.39.4 on Fri, 09 Sep 2016 04:42:03 UTC All use subject to http://about.jstor.org/terms Czech Sociological Review, IV, (1/1996) tendency to social stability through mechanisms in which society strikes back against attempts to impose an arbitrary order on it. One such mechanism may be the ability of those in privilege to confound attempts to undermine their relative advantage. It is suggested that social inequality sits too deep in the fabric of society to be reachable by cautious after-the-fact redistributional measures [cf. eg. Goldthorpe et al. 1980]. The implication is that the choice for society is between drastic market regulations or laissezfaire, with no middle ground for reformist and piecemeal strategies. I am not concerned here with the question of what the distribution of income should be. Nor do I consider such major controversies as equality vs. liberty vs. efficiency. I am concerned only with the power of transfer and tax policies for influencing income inequality, if society should want to move towards more equality than is generated in the market. This needs to be known for considerations of what government can do, but knowing this is not necessarily of much consequence for considerations of what government should do. It is the potential I am concerned with, and the paper does not offer a comprehensive review of actual country experiences. A recent review of this kind is available in [Atkinson et al. 1995]. Obviously, it is the normative distribution between persons or households that is considered, and not macro-distributions, for example between labour and capital.