INCOME INEQUALITY AND REDISTRIBUTION IN THE AFTERMATH OF THE 2007–2008 CRISIS

Abstract

This paper provides a detailed empirical assessment of the evolution of income inequality and the redistributive effects of the tax and transfer system following the 2007–2008 crisis. It focuses on the U.S. case, drawing on data from the Current Population Survey (CPS) for the period 2007–2012. In contrast with most existing studies, it uses a wide range of inequality indicators and looks in detail at several sections of the income distribution, allowing for a clearer picture of the heterogeneous consequences of the crisis. Furthermore, it analyzes the contribution of different components of the tax and transfer system, beyond its overall cushioning effect, which allows for a more refined assessment of its effectiveness. Results show that although the crisis implied income losses across the whole income distribution, the burden was disproportionately born by low- to middle-income groups. Income losses experienced by richer households were relatively modest and transitory, while those experienced by poorer households were not only strong but also highly persistent. The tax and transfer system, particularly cash transfers, had a crucial role in taming the increase in income inequality during the Great Recession (GR) and in the immediate aftermath of the crisis. After 2010, however, its effect became weaker and income inequality experienced a new surge. The findings of this paper contribute to a better understanding of the distributional consequences of aggregate crises and the role of tax and transfer policies in stabilizing the income distribution in a crisis aftermath.