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 1234567890():,; Frederico Cantante1 ✉ The rise of economic inequality in the past few decades is one of the most relevant phenomena 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 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: 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 I Introduction: inequality, here and now ncome inequality in most western countries has been rising in the last decades. The OECD report Growing Unequal (2008) was a tipping point in political and academic awareness about it, because it showed that the benefits of economic growth since the 1980s were unevenly distributed within the most developed countries. In the 1980s, the richest 10% earned about seven times more than the bottom 10%, in the mid-2010s this gap was close to 10 (OECD, 2015). These conclusions rely on survey data. If we look at fiscal data, the rise of inequality is also impressive. In the 1980s, the top 10% in European countries earned about 30–35% of total income, in 2016 their share increased to 35–40%. Inequality rose much more sharply in the EUA: the top 10% share went up from 30–35% to about 45–50% of total income (Alvaredo et al., 2017). Several studies highlighted that economic inequality is not a statistical curiosity, but rather a phenomenon that have multidimensional negative impacts. For instance, on social mobility (OECD, 2018; Dubet, 2010; Esping-Andersen, 2005), financial stability (Galbraith, 2012; Kumhof and Rancière, 2010), or on subjective well-being (Alois, 2014). Inequality can warm the way societies function (Wilkinson and Pickett, 2009) and have negative effects on life trajectories and opportunities. In this sense, growing inequality must be addressed both as a normative problem that challenges distributive justice, but also as a social, economic, and political risk. This paper will focus on income inequality in European countries and the redistributive impact personal taxation has on inequality. Its most innovative contributions consist in analysing income redistribution at the European level looking at narrow top quantiles, namely the top 5%, and to propose a typology of income (re)distribution. The next section is devoted to develop a theoretical background regarding the causes behind the upward trend of income inequality; thereafter, explanations about the methodological background that support the data analysis will be given; then, the impact of personal tax on income inequality is quantified using three measures of income redistribution; in section “Inequality and taxes: a typology”, a typology of inequality and redistribution in Europe will be proposed; finally, critical issues on tax policy will be addressed. Economic and institutional drivers As wages represent about 70–80% of disposable household income (ILO, 2015; OECD, 2011), income inequality is strongly determined by wage inequality. The most influential theory explaining wage inequality is probably the race between technology and skills. According to this theory, technology increases the productivity gap between highly skilled workers and low skill workers. If the number of highly skilled workers does not keep up with their demand, their pay premium will rise above average earnings and pay inequality widens. This theory has a “nuanced view” (Kierzenkowski and Koske, 2012), according to which globalisation fosters the opposition between the highly qualified workforce and the routine manual workers, because the tasks performed by the later can be done in low wage countries. In this sense, globalisation and technology-driven inequality are two interdependent phenomena (Milanovic, 2016). Although this race might be a relevant aspect pushing wage inequality up, institutional changes that took place in the labour market in last decades play a decisive role explaining market income inequality. The reduction of union density and collective bargaining foster inequality (Vaughan-Whitehead and Vazquez-Alvarez, 2018; Jaumotte and Buitron, 2015; OECD, 2011). Denk (2015) demonstrates that countries where collective bargaining is higher have lower concentration of wages in 2 the top 1%. The growth of precariousness, facilitated by the fallback of unions and labour deregulation, has also impacted on wage distribution. The proliferation of non-standard labour relations promotes earning inequalities between precarious workers and employees who have permanent contracts (Cohen and Ladaique, 2018). These analytical approaches have only the distribution of wages in mind. There are of course other drivers that have an impact on income distribution. Piketty’s r > g formula is amongst the most influential proposals. It states that the gap between the rate of return to capital and economic growth has been rising since de 1980s. This means that wealth inequality, in a context of globalisation and financial deregulation (Piketty and Cantante, 2018), is pushing income inequality up. Another driver of income inequality is factor inequality. Atkinson (2015) highlights the fact that the wage share has been decreasing since the 1970s in most western countries. Both institutional and technological explanations used to address wage inequality growth are prominent when it comes to analysing factor inequality. Inequality of market income is determined by economic dynamics and institutional settings. The later tend to have an impact on the former. For instance, labour market institutions influence both the distribution of wages and factor distribution. Minimum wage or collective bargaining have an impact on primary distribution of income. Additionally, the redistribution of income is set after the distribution of primary/market income. Social transfers and personal taxes are the main mechanisms of monetary income redistribution. Immervoll and Richardson (2011) showed that until the 1990s the growth of income inequality was mainly fuelled by market inequality. In the following decade, rising inequality was explained by the reduction of redistributive efficacy. That is, the impact of social transfers and taxes in (...truncated)