The US-EU gap: predistribution plays a key role in moderating income inequality

US taxes and transfers seem to narrow its inequality gap with Europe. Why is it even more unequal, then? Thomas Blanchet, Lucas Chancel, and Amory Gethin write that countries cannot redistribute their way out of inequality. They say that pre-distributive factors, including equal access to education and health care, unionization, and labor market regulation play a dominant role in moderating the rise in income inequality. income in the 21st century.

A common narrative is that the United States’ weaker welfare state is the main reason for its relatively high levels of inequality compared to other high-income economies, especially Europe. International organizations and political analysts generally push this narrative to focus on progressive taxation and narrowly targeted benefits as key levers that would enable a more equitable distribution of economic growth in the “land of opportunity”.

Our recent research challenges this view. While income gaps in the United States are significantly larger than in any European country, perhaps even larger than previously thought, these differences are entirely due to greater pre-tax inequality, and no to taxes and transfers. Predistribution, not redistribution, explains why Europe is more egalitarian than the United States.

We are building a new historical database that provides quality, comparable statistics on inequality in twenty-six European countries and the United States since 1980, and we confirm a well-known fact: inequality is significantly higher in the United States. United than in Europe. In 2017, the top 10% before tax earners earned 48% of their income in the United States, compared to about 37% in Europe. This has not always been the case: in the early 1980s, the United States and Europe had comparable levels of inequality. While income disparities have increased in Europe over the past forty years, this increase has been much smaller than that seen in the United States, resulting in large differences in inequality between the two regions today.

Figure 1 provides a detailed picture of the distribution of economic growth in Europe and the United States from 1980 to 2017. The x-axis represents different income percentiles, while the y-axis represents the annual growth rate the pre-tax income they have experienced. Average income growth has been slightly higher in the United States (1.4% per year) than in Europe (1.1%) over the past four decades, but this average difference hides substantial differences between segments the richest and the poorest of the population. The average pre-tax income of the top 1% has grown much faster in the United States than in Europe. Meanwhile, low-income groups have benefited significantly more from macroeconomic growth in Europe than in the United States: the average income of the bottom 50% has increased in Europe, while it has stagnated in the United States and even decreased for the poorest 30%.

Figure 1 – The rise of inequality in Europe and the United States, 1980-2017

The second key result is that taxes and transfers cannot explain why inequality is lower and has increased much less in Europe than in the United States since 1980. On the one hand, public spending is lower in the States United States, so lower income groups tend to receive lower transfers. As a result, about 13% of national income is received by the bottom 50% of earners in the United States in the form of social transfers, health care and other public expenditures today, compared to 18% of national income in France and up to 23% in France. Denmark. In contrast, taxes tend to be more progressive in the United States. Indirect taxes, which are regressive because they are paid by consumers, are much lower in the United States than in Europe. Social security contributions, generally fixed or degressive, are higher in Europe. And, finally, the progressive federal income tax in the United States generates more revenue than in a number of European countries.

Overall, the US tax and transfer system reduces inequality far more than that of any European country. As shown in Figure 2, the net transfer received by the bottom 50% (i.e. transfers received minus taxes paid) was equivalent to about 6% of national income in the United States in 2017. The the corresponding figure was 4% in Denmark and just above 1% in Spain. Contrary to popular opinion, government redistribution cannot explain why the United States is more unequal than Europe. On the contrary: taxes and transfers seem to reduce the inequality gap between the two regions.

Figure 2 – Government redistribution is greater in the United States than in Europe

The implications of these findings are quite clear. While progressive taxation and social spending play a key role in reducing poverty and inequality, they cannot well explain cross-country differences in income inequality today or how it has changed over the years. last decades. Countries do not just redistribute to get out of inequality. “Predistribution” factors, including equal access to education and health care, unionization and labor market regulation, play a prominent role in moderating the rise in income inequality in the 21st century. century. This calls for renewed attention to policies enabling a more inclusive distribution of wages and capital income, beyond taxes and transfers, which act as necessary corrective factors but often fail to shape long-term income inequality. .

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