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Four Profiles of Inequality and Tax Redistribution in Europe

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Four Profiles of Inequality and Tax Redistribution in Europe ARTICLE https://doi.org/10.1057/s41599-020-0514-4 OPEN Four profiles of inequality and tax redistribution in Europe ✉ Frederico Cantante1 The rise of economic inequality in the past few decades is one of the most relevant phe- nomena in western countries recent history. Market income distribution pushed inequality up and challenged welfare state capacity to deal with economic gaps. Market inequality or gross 1234567890():,; income inequality are considerably higher than disposable income inequality. This has to do with redistributive state policies. This paper analyses gross income inequality in the EU countries and measure the impact of personal taxes on income distribution. Several measures of redistributive tax impact on income inequality will be explored. Having in consideration both the level of gross income inequality and the impact of personal taxes on top shares, a typology of income distribution and redistribution in Europe will be drawn. ✉ 1 ISCTE-IUL, CoLABOR, Lisbon, Portugal. email: [email protected] HUMANITIES AND SOCIAL SCIENCES COMMUNICATIONS | (2020) 7:33 | https://doi.org/10.1057/s41599-020-0514-4 1 ARTICLE HUMANITIES AND SOCIAL SCIENCES COMMUNICATIONS | https://doi.org/10.1057/s41599-020-0514-4 Introduction: inequality, here and now ncome inequality in most western countries has been rising in the top 1%. The growth of precariousness, facilitated by the Ithe last decades. The OECD report Growing Unequal (2008) fallback of unions and labour deregulation, has also impacted was a tipping point in political and academic awareness about on wage distribution. The proliferation of non-standard labour it, because it showed that the benefits of economic growth since relations promotes earning inequalities between precarious the 1980s were unevenly distributed within the most developed workers and employees who have permanent contracts (Cohen countries. In the 1980s, the richest 10% earned about seven times and Ladaique, 2018). more than the bottom 10%, in the mid-2010s this gap was close to These analytical approaches have only the distribution of 10 (OECD, 2015). These conclusions rely on survey data. If we wages in mind. There are of course other drivers that have an look at fiscal data, the rise of inequality is also impressive. In the impact on income distribution. Piketty’s r > g formula is 1980s, the top 10% in European countries earned about 30–35% amongst the most influential proposals. It states that the gap of total income, in 2016 their share increased to 35–40%. between the rate of return to capital and economic growth has Inequality rose much more sharply in the EUA: the top 10% share been rising since de 1980s. This means that wealth inequality, went up from 30–35% to about 45–50% of total income (Alvaredo in a context of globalisation and financial deregulation (Piketty et al., 2017). and Cantante, 2018), is pushing income inequality up. Another Several studies highlighted that economic inequality is not a driver of income inequality is factor inequality. Atkinson statistical curiosity, but rather a phenomenon that have multi- (2015) highlights the fact that the wage share has been dimensional negative impacts. For instance, on social mobility decreasing since the 1970s in most western countries. Both (OECD, 2018; Dubet, 2010; Esping-Andersen, 2005), financial institutional and technological explanations used to address stability (Galbraith, 2012; Kumhof and Rancière, 2010), or on wage inequality growth are prominent when it comes to ana- subjective well-being (Alois, 2014). Inequality can warm the way lysing factor inequality. societies function (Wilkinson and Pickett, 2009) and have nega- Inequality of market income is determined by economic tive effects on life trajectories and opportunities. In this sense, dynamics and institutional settings. The later tend to have an growing inequality must be addressed both as a normative pro- impact on the former. For instance, labour market institutions blem that challenges distributive justice, but also as a social, influence both the distribution of wages and factor distribution. economic, and political risk. Minimum wage or collective bargaining have an impact on pri- This paper will focus on income inequality in European mary distribution of income. Additionally, the redistribution of countries and the redistributive impact personal taxation has on income is set after the distribution of primary/market income. inequality. Its most innovative contributions consist in analysing Social transfers and personal taxes are the main mechanisms of income redistribution at the European level looking at narrow top monetary income redistribution. Immervoll and Richardson quantiles, namely the top 5%, and to propose a typology of (2011) showed that until the 1990s the growth of income income (re)distribution. The next section is devoted to develop a inequality was mainly fuelled by market inequality. In the fol- theoretical background regarding the causes behind the upward lowing decade, rising inequality was explained by the reduction of trend of income inequality; thereafter, explanations about the redistributive efficacy. That is, the impact of social transfers and methodological background that support the data analysis will be taxes in reducing primary inequality got lower. given; then, the impact of personal tax on income inequality is The reduction of tax impact on inequality in the last decades is quantified using three measures of income redistribution; in due to two main facts: on the one hand, cuts in top income tax section “Inequality and taxes: a typology”, a typology of inequality rates; on the other hand, the dissemination of semi-dual tax and redistribution in Europe will be proposed; finally, critical systems since the 1980s. In these systems, capital income is taxed issues on tax policy will be addressed. at flat and more favourable rates (Förster et al., 2014; Piketty, 2013; Brys et al., 2011). Income aggregation was a tax principle applied in every European or OECD country until the 1980s. Economic and institutional drivers Nowadays, progressive taxation applies only to wage and pen- As wages represent about 70–80% of disposable household sions. Capital income is taxed at flat and autonomous rates. The income (ILO, 2015; OECD, 2011), income inequality is strongly main reasons why states adopted this policy has to do with determined by wage inequality. The most influential theory investment attraction and to avoid capital drain. explaining wage inequality is probably the race between tech- nology and skills. According to this theory, technology increases the productivity gap between highly skilled workers and low skill Methodology workers. If the number of highly skilled workers does not keep up The following analysis is based on European Union Statistics on with their demand, their pay premium will rise above average Income and Living Conditions (EU-SILC), an instrument aiming earnings and pay inequality widens. This theory has a “nuanced to collect timely and comparable cross-sectional and longitudinal view” (Kierzenkowski and Koske, 2012), according to which multidimensional microdata on income, poverty, social exclusion globalisation fosters the opposition between the highly qualified and living conditions. Although the data refers to the individual workforce and the routine manual workers, because the tasks distribution of income, the unit of analysis that serves as reference performed by the later can be done in low wage countries. In this for the calculation of individual income is the household. To sense, globalisation and technology-driven inequality are two consider the impact of differences in household size and interdependent phenomena (Milanovic, 2016). composition household income is “equivalised”. The equivalised Although this race might be a relevant aspect pushing wage income attributed to each member of the household is calculated inequality up, institutional changes that took place in the labour by dividing the total income of the household by the equivalisa- market in last decades play a decisive role explaining market tion factor. Eurostat uses the OECD-modified scale, which gives a income inequality. The reduction of union density and collec- weight of 1.0 to the first person aged 14 or more, a weight of 0.5 tive bargaining foster inequality (Vaughan-Whitehead and to other persons aged 14 or more and a weight of 0.3 to persons Vazquez-Alvarez, 2018; Jaumotte and Buitron, 2015;OECD, aged 0–13. 2011). Denk (2015) demonstrates that countries where collec- Gross income is composed by several types of income, namely tive bargaining is higher have lower concentration of wages in wages, income from self-employment, pensions, social transfers 2 HUMANITIES AND SOCIAL SCIENCES COMMUNICATIONS | (2020) 7:33 | https://doi.org/10.1057/s41599-020-0514-4 HUMANITIES AND SOCIAL SCIENCES COMMUNICATIONS | https://doi.org/10.1057/s41599-020-0514-4 ARTICLE and interfamily transfers received. The adjusted gross income Table 1 Tax rate paid by the top 10%, 5% and national consists of gross income plus interfamily transfers payed, which average, European countries (2013–2014) (%). enables to analyse gross income without nontax deductions. Tax redistribution will be measured using a variable which considers both personal income tax and social security con- Top 10% Top 5% Average tributions. EU-SILC data does not allow to differentiate income Netherlands 40.5 41.6 31.8 deductions that are typically progressive (personal income taxes) Denmark 36.9 37.4 31.5 from deductions that are usually proportional (social security Iceland 37.0 37.8 29.3 Switzerland 29.7 30.2 27.6 contributions). In this sense, the concept of personal tax used in Norway 35.2 36.8 26.4 this analysis aggregates these two kinds of income deductions. Germany 31.7 32.0 26.2 Net income is computed by deducting income taxes from the Austria 32.7 33.7 25.2 adjusted gross income. Portugal 37.1 38.8 25.1 Survey data like the EU-SILC have limitation when it comes to Sweden 32.9 35.0 25.0 focus on restrict top quantiles, namely the top 1% and top frac- Italy 33.0 34.6 24.8 tiles (Atkinson, 2015; Piketty, 2013).
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