Abstract
European countries have the world's most redistributive tax and transfer systems. Although they have been well equipped to deal with vertical inequality -- that is, fostering redistribution from the rich to the poor -- less is known about their performance in dealing with horizontal inequality, that is, in redistributing among socioeconomic groups. In a context where individuals may not only care about vertical redistribution, but also about the economic situation of the specific groups to which they belong, the horizontal dimension of redistribution becomes politically salient and can be a source of social tensions. This paper analyzes the performance of the 28 EU countries on redistribution across (i) age groups, (ii) occupational groups, and (iii) household types over 2007–2014 using counterfactual simulation techniques. The analysis finds a great degree of heterogeneity across countries: changes in the tax and transfer system have particularly hit the young and losers of occupational change in Eastern European countries, while households with greater economic security have benefited from these changes. The findings suggest that horizontal inequality is a dimension that policy makers should take into account when reforming tax and transfer systems.
Highlights
One characteristic of European societies is their strong degree of income redistribution, resulting from progressive taxation and relatively generous transfers, as well as extensive regulations to protect the poor
The chart shows that in Western Europe, the size of the redistribution has increased in most countries between 2007 and 2014.6 The largest increase in the size of redistribution among Western European countries can be observed in Greece, where the reduction in market income inequality grew by 7 Gini points – as we show later, most of this change was not due to changes in taxes and transfer policies but rather to an almost automatic effect in a context of worsening market incomes
The second term corresponds to the difference in the Gini coefficient of disposable income due to changes in market income – that is, the change in the Gini coefficient of disposable income that would have been observed if the tax and transfer system had remained unchanged and only market income had changed between the two periods
Summary
One characteristic of European societies is their strong degree of income redistribution, resulting from progressive taxation and relatively generous transfers, as well as extensive regulations to protect the poor. The European Union’s average level of redistribution equals 21 Gini points This is significantly larger compared to other high-income countries, such as Japan (16 Gini points), Australia (15 Gini points), the United States (11 Gini points), Switzerland (9 Gini points), and the Republic of Korea (5 Gini points), as well as compared to upper-middle-income economies with comparable market income inequality, such as the Russian Federation (11 Gini points), Chile (3.2 Gini points), Turkey (2.5 Gini points), and Mexico (1.9 Gini points). We find that the majority of EU member states have experienced an increase in overall redistribution between 2007 and 2014, with the exception of some Eastern European countries that effectively flattened their income tax schedule The drivers of these changes differ across countries: in certain cases, increased redistribution results from changes in market incomes, in other cases from tax-benefit changes, sometimes linked to tax-based budget consolidation, in particular in Southern Europe. Fuest, Peichl (2012) and Dolls, Fuest, Peichl, Wittneben (2018) analyze the capacity of European tax benefit systems to act as an automatic stabilizer in times of income changes and how this capacity has been affected by policy changes
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