Tackling)income)inequality:)the) roleoftaxesandtransfers) · 2 OECD Secretariat calculations from EU-SILC – preliminary results. Source: ......

Tackling income inequality: the role of taxes and transfers

Mauro Pisu

(Economics Department OECD)

Tax policy in Latvia: challenges and opportunitiesRiga

16 Jan 2015

Context

•  Market income-‐inequality was rising in many OECD countries before the crisis

•  Crisis has made the issue of inequality and poverty all the more important

§  e.g.: In the US the top 1% captured 95% of the income gains from 2009 to 2012 (Saez, 2013)

•  Link between inequality and growth is being reassessed: §  some evidence that inequality above a certain level

may hinder growth

Context a

nd m

oQvaQo

ns

Aims of the study

•  What are the main determinants of inequality in OECD countries?

•  Describe the role of taxes and transfers in reducing inequality

•  Analyse policy trade-‐offs between growth and inequality Context a

nd m

oQvaQo

ns

Roadmap of the presenta;on

1.  Factors affecQng the distribuQon of labour income; overview of income-‐inequality trends during the crisis

2.  The role of taxes and transfers in reducing inequality

3.  Policy trade offs and complementariQes between inequality and growth

Context a

nd m

oQvaQo

ns

Income-‐inequality trends – a brief overview

Market income inequality is driven by labour income (much) more than by capital income

Contribu;ons to the concentra;on coefficient of market income, working age popula;on, in the late 2000s

1990-‐2007 (or closest year)

Income ineq

uality – de

term

inants

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Wages and salaries Self-employment income Capital income

Source: OECD Income DistribuQon and Poverty Database

Concentration coefficient

Taxes and transfers reduce market income inequality

The tax and transfer sy

stem

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Before taxes and transfers After taxes and transfers

1 2009 for Japan, 2010 for Belgium, 2012 for Australia, Finland, Korea, Netherlands and the United States. 2 OECD Secretariat calculations from EU-SILC – preliminary results. Source: OECD Income Distribution database and OECD Secretariat calculations.

Market and disposable income inequality Gini coefficient, scale from 0 "perfect equality" to 1 "perfect

inequality", 2011¹

The crisis has increased market income inequality but taxes and transfers cushioned the

impact on disposable income


stem

Market income inequality rose considerably Percentage point changes in the Gini coefficient of household market

and disposable incomes between 2007 and 2011

Notes: Data for 2007 refer to 2006 for Chile and Japan; and 2008 for Australia, France, Germany, Israel, Mexico, Norway, New Zealand, Sweden, and the United States. Data for 2011 refer to 2009 for Japan; 2010 for Austria and Belgium; and 2012 for Australia, Finland, Hungary, Korea, Mexico, the Netherlands and the United States. For Hungary, Mexico and Turkey data on market income inequality are not available. There is a break in the series in 2011 for the United Kingdom, and results are not strictly comparable. 2011 data for Ireland and the United Kingdom are provisional. OECD-‐30 average excludes Hungary, Mexico, Switzerland and Turkey. Source: OECD Income DistribuQon and Poverty Database.

-4

-2

0

2

4

6

8

10

- 4

- 2

0

2

4

6

8

10Market income inequality (↗) Disposable income inequality

Taxes and social transfers mi;gated falls in

market income in most OECD countries


stem

Annual percentage changes in household disposable income between 2007 and 2011, by income component

Notes: Market incomes are reported net of taxes in Hungary, Mexico and Turkey. A posiQve sign of income taxes indicates a lower tax burden in total income. OECD-‐29 average excludes Hungary, Mexico, Turkey (for which data on taxes are not available), the United Kingdom (for which no comparable data for 2011 are available) and Switzerland (for which 2007 data are not available). 2011 data for Ireland are provisional. Source: OECD Income DistribuQon and Poverty Database.

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%Income taxes Social transfersTotal market income Disposable income (↗)

The pain of the crisis was not equally shared


stem

Poorer households tended to lose more or gain less Annual percentage changes in household disposable income between

2007 and 2011, by income group

Notes: There is a break in the series in 2011 for the United Kingdom, and results are not strictly comparable. 2011 data for Ireland and the United Kingdom are provisional. Source: OECD Income DistribuQon and Poverty Database.

-15%

-10%

-5%

0%

5%

-15%

-10%

-5%

0%

5% Total (↗) Top 10% Bottom 10%

How taxes and transfers reduce inequality

In most, but not all countries, the redistribu;ve impact of cash transfers is higher than that of

taxes


stem

Point reduction in concentration coefficients late 2000s

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

FIN

DNK

IRL

CZE

SWE

DEU

GBR

BEL

AUS

NOR

SVN

EST

NZL

AUT

ITA

SVK

NLD

OECD

ISR

CAN

LUX

POL

PRT

USA

JPN

FRA

ESP

CHE

ISL

CHL

KOR

Household taxes Public cash transfers

Source: OECD Income DistribuQon and Poverty Database.

Size and progressivity of taxes and transfers determine the redistribu;ve impact


stem

•  The % reduction in inequality between market income and market income plus transfers ≈ size of cash transfers + Progressivity of cash transfers (Kakwani index)

market income plus transfers and disposable income ≈ size of taxe systems + Progressivity of taxes (Kakwani index)

(Assuming transfers are paid before taxes)

Countries with large cash transfers tend to have less progressive systems


stem

Late 2000s

AUS

AUT

BELCAN

CHE

CHL

CZE

DEU

DNK

ESP

EST FIN

FRA

GBRIRL

ISL

ISR

ITA

JPN

KOR LUX

NLD

NOR

NZL

POL

PRT

SVK

SVN

SWEUSA

OECD-30

y = -0.01x + 0.73R² = 0.30

0.0

0.2

0.4

0.6

0.8

1.0

0 5 10 15 20 25 30 35 40Cash transfers as a share of household disposable income

Progressivity index of cash transfers


Countries with large household income taxes tend to have less progressive taxes


stem

Late 2000s

AUS

AUTBEL

CAN

CHL

CZE

DNK

ESTFIN

FRA

DEU

ISL

IRLISR

ITA

JPN

KOR LUX

NLD

NZL

NOR

POL

PRT

ESPSVK

SVN

SWE

CHE

GBR

USA

OECD-‐30

y = -‐0.0022x + 0.1693R² = 0.1438

-‐0.05

0.00

0.05

0.10

0.15

0.20

0.25

0 10 20 30 40 50 60

Progressivity index of household taxes

Household taxes as a share of household disposable income


Cash transfers: size and progressivity explain their impact on inequality


stem

In the late 2000s, working age populaQon


Policy trade offs and complementarQes between income inequality and growth

Measures to improve human capital are clear win-‐win strategies.

Impact of p

olicies

A rise in: Employment rate

Earnings equality

Labour income equality

GDP per capita

Equity in educaQon ? + + +

Upper-‐secondary and terQary graduaQon rates ? + + +

IniQaQves to foster the integraQon of immigrants + + + +

IniQaQves to raise female labour force parQcipaQon + + + +

IniQaQves to combat discriminaQon + + + +

In the area of labour and product markets, the equality effects depend on the precise measure.

A rise in: Employment rate

Earnings equality

Labour income equality

GDP per capita

Minimum wage (relaQve to median wage) 0/-‐ + ? 0/-‐

UnionizaQon ? + + ?

Legal extensions of collecQve wage agreements -‐ ? -‐ -‐

The gap between protecQon on regular vs. temporary work -‐ -‐ -‐ -‐

Product market regulaQon -‐ 0/+ ? -‐

Impact of p

olicies

Many tax policies imply trade-‐offs with respect to the growth and distribu;on objec;ves.

Revenue-‐neutral tax changes: Disposable income equality

GDP per capita

Change tax mix from income to consumpQon tax -‐ +

Change tax mix from income to real estate tax -‐ +

Change tax mix from income to wealth and inheritance tax ? +

Increasing top PIT rates and tax free allowances + ?

Cugng tax expenditures and marginal rates + +

Impact of p

olicies

Contact informa;on and underlying documents

Webpage •  hhp://www.oecd.org/economy/public-‐finance/

lessincomeinequalityandmoregrowth-‐aretheycompaQble.htm

Going for Growth 2012 •  Chapter 5 « Reducing income inequality while boosQng economic

growth: can it be done? » Monograph: •  OECD (2012), Divided We Stand: Why Inequality Keeps Rising,

Directorate of Employment, Labour and Social Affairs, OECD

Others •  Income-‐Inequality-‐Update (hhp://www.oecd.org/els/soc/OECD2014-‐

Income-‐Inequality-‐Update.pdf)

Furthe

r informaQ

on

OECD Economics Department Working Paper Series

Working Paper Series on “Less income inequality and more growth – Are they compa;ble? ” •  WP 924: Part 1. Mapping income inequality across the OECD •  WP 925: Part 2. The distribuQon of labour income •  WP 926: Part 3. Income redistribuQon via taxes and transfers across

OECD countries •  WP 927: Part 4. Top incomes •  WP 928: Part 5. Poverty in OECD countries •  WP 929: Part 6. The distribuQon of wealth •  WP 930: Part 7. The drivers of labour earnings inequality – An

analysis based on condiQonal and uncondiQonal quanQle regressions •  WP 931: Part 8. The drivers of labour income inequality – A review of

the recent literature

Furthe

r informaQ

on

Tackling)income)inequality:)the) roleoftaxesandtransfers) · 2 OECD Secretariat calculations from EU-SILC – preliminary results. Source: ......

Documents