Inequality – Fundamentals “Redistribu+on of Income by Social Transfers” A Presenta+on by: Mar+n Bierey & Toni Brodführer “Why do we need redistribu+on?” Social Justice
Economic growth
Agenda   Introduc)on   Measures to redistribute income   Redistribu)on policies •  Developed countries •  Focus: EU •  Developing countries   Explana)ons for different redistribu)on policies •  EU vs. USA   Conclusion -­‐3-­‐ Measures to redistribute income   Social transfers
• Social assistance benefit
• Social insurance (unemployment insurance, pensions)
  Social services
• Health
• Education
• Social services (e.g. infrastructure investments )
  Taxes
• Progressive tax system
(taken into account all taxes: direct and indirect)
-­‐4-­‐ Social transfers reduce inequality -­‐5-­‐ Do taxes reduce inequality? Direct taxes •  income tax
•  capital gains tax
•  (corporate tax)
Progressive Regressive Objectives:
make disposable income more equal
&
Funding for social spending
Indirect taxes •  Value added tax (VAT)
•  General sales tax
•  import duty
-­‐6-­‐ Taxes as percent of overall taxes
Country Asia La+n America Africa Middle East Former Communist OECD (high income) Type of tax Direct Taxes Indirect Taxes Direct Taxes Indirect Taxes Direct Taxes Indirect Taxes Direct Taxes Indirect Taxes Direct Taxes Indirect Taxes Direct Taxes Indirect Taxes 1990-­‐1994 21,91 44,51 25,14 45,87 20,42 53,56 19,68 25,43 15,86 44,85 34,80 24,44 2000-­‐2004 22,58 45,79 20,15 46,57 20,09 49,12 21,23 33,08 12,89 41,53 31,75 28,57   Higher share of indirect taxes in developing countries
(48 % vs. 32 % in developed countries)
•  tax base (give the low income) is small
•  small tax collection efficiency (high tax evasion)
•  large informal sector
 Share of indirect taxes increased
 VAT increased in all countries (e.g. from 21 to 28 % for OECD)
  Share of direct taxes decreased
  Corporate tax rates decreased (38 % to 26.8 % on average)
•  Due to tax competition
 Top personal income tax rates decreased (3% on average)
-­‐7-­‐ Social transfers   Social insurance: pension, unemployment insurance, medical insurance
(funded by contributions)
  Social assistance: social welfare aid  Targeted at the poorest
(funded by taxes and small part of contributions)
-­‐8-­‐ Social services   Universal programs supporting low income groups (replace public spending)
  Positive long-term effect without economic distortions
  Higher economic potential
  Should be focused on primary and secondary education & primary health care
-­‐9-­‐ Redistribu+on – developed countries Average Private income Disposable income Redistribu)on 1990 0.41 0.26 0.15 2000 0.45 0.28 0.17 Private income = pre-tax “market income”
Disposable income = pre-tax income - taxes + social benefits (- social insurance)
Redistribution = Private income – disposable income
-­‐10-­‐ Social Transfers EU -­‐11-­‐ Social Transfers EU -­‐12-­‐ How much of total income comes from social transfers (%) Social transfers (in absolute cash) Effec+veness of redistribu+on system Index of inequality Country Gini A B C Austria 0.290 37.2 2.1 Belgium 0.287 41.5 2.7 Denmark 0.226 46.0 4.0 France 0.292 36.7 1.8 Germany 0.293 36.9 2.0 Greece 0.341 26.6 1.5 Ireland 0.347 31.8 2.0 Italy 0.312 31.3 1.0 Luxembourg 0.307 34.9 2.3 Netherlands 0.269 40.8 2.3 Portugal 0.371 22.7 1.3 Spain 0.325 34.2 2.2 United Kingdom 0.332 35.5 3.2 A: Distribution of disposable income
B: Proportional decline in inequality due to cash transfers (%)
C: Increase in inequality due to a uniform 10 % cut in cash transfers
-­‐15-­‐ Redistribu+on – developing countries   poor redistribution by taxes
  large share of informal workers complicate social transfers
Latin & South America
  most unequal region (Gini coefficient reduction only 1.4 %)
  Inequality decreased in Colombia 3.4 % (best)
increased in Peru
0.2 % (worst)
  poor redistribution by taxes (no reduction of inequality):
  in Chile taxes increased inequality by 1%
  only the richer people benefit from public social protection
(only group who contributes to social security)
  no universal pension system
 Could Conditional cash transfers be a solution ?
-­‐16-­‐ Redistribu+on – developing countries Asia Pacific
Only 35% covered by any form of social security
  additional social security by family network (East Asian)
  “informal security” reliance on community welfare system (South Asian)
Africa
  difficult to obtain data
  best practice: Mauritius (1980 – 2006)
  4.1 % annual growth, 2% employment growth , poverty declined by 12%
  universal health, education and pension system
  essential commodities are subsidized
  high progressitivity of tax system (high tax exemptions)
-­‐17-­‐ Inequality: EU vs. USA EU USA Gini coefficient (2005) 29.9 45.0 Public Social Expenditure 23.80 % 14.70 % Old-­‐Age (Pensions) 8.8 % 5.3 % Health 6.1 % 6.2% Unemployment 2.1% 0.5% Replacement ra+o (ini+al / long term) 69% / 47 % 66% / 32 % Tax revenues 25.8 % 20.9% Social contribu+ons 7.0% 15.5% Ac+ve members in charitable organiza+ons 7.9 % (GER) 27.3 % Charity givings 0.22 % (GER) 1.67 % Figures as percent of GDP (Time horizon: 2000 – 2005)
-­‐18-­‐ Explana+ons for inequality differences R² = 10 %
-­‐19-­‐ Explana+ons for inequality differences Dependent variable: Social Transfers (as percent of GDP)
Economic explanations:
  Income mobility (R²= 3,6%)
  Openness of economy (R²= 10.94%)
Political explanations:
  Voting System – degree of proportional representation (R²=16,6%)
  Government (Presidential / parlamientary)
  system of political parties (high or low barriers)
  Fiscal decentralization
Behavioural Explanations:
  Immigration (R²= 19.4%)
  Birth rate (R²=10.5%)
  Belief that luck determines success (R²=30%)
 Political attitude (left – right) (R²=0.05%)
 Religion (R²=31.8%)
-­‐20-­‐ Sugges+ons for redistribu+on policies Developed countries:
  Increase progressivity of tax system (less indirect taxes)
  BUT: taxes and social policy should need to support employment (no distortions)
  increase the amount of social services (for health and education)
For developing countries:
  social policy should target entire population (even informal workers)
  Provide access to basic social services (primary education & health)
  Conditional Cash benefits
Critics:
  redistribution measured by comparing pre and post transfer income
  assumes no behavioral responses
(that would occur in a “world” without transfers)
  Implication: Pre-post comparisons provide upper bound estimates
-­‐21-­‐ Sources Akkoyunlu, Sule / Neustadt, Ilja / Zweifel, Peter (2009): Why Does the Amount of
Income Redistribution Differ between the United States and Europe? The Janus
Face of Switzerland, Swiss Federal Institute Zurich, 2009.
Alesina, Alberto / Glaeser, Edward / Sacerdote, Bruce: Why doesn’t the US have a
European style welfare system, NBER Working Paper No. 8524, 2001.
Heady, Christopher: The Distributional Impact of Social Transfers in the European
Union: Evidence from the ECHP, 1999.
Lambert, Peter / Kim, Kinam: Redistributive Effect of U.S. Taxes and Public
Transfers, 1994-2004, Ministry of Health and Welfare, Republic of Korea, and
University of Oregon, 2007.
Prasad, Naran: Policies for redistribution - The use of taxes and social transfers,
INTERNATIONALINSTITUTE FOR LABOUR STUDIES, 2008.
-­‐22-­‐ Thank you for your ajen+on!