Government consumption in the DINA framework: allocation methods and consequences for post-tax income inequality

International Tax and Public Finance https://doi.org/10.1007/s10797-024-09832-1 Government consumption in the DINA framework: allocation methods and consequences for post‑tax income inequality Lukas Riedel1 · Holger Stichnoth1,2,3,4 Accepted: 8 February 2024 © The Author(s) 2024 Abstract About half of government expenditure in the United States takes the form of government consumption (e.g., education, defense, infrastructure). In many studies of post-tax inequality based on the Dina framework (including the influential study by Piketty et al. (Q J Econ 133(2):553–609, 2018), government consumption is allocated either proportionally to post-tax disposable income or on a per-capita basis, and the level of inequality is fairly sensitive to this choice. This paper provides direct evidence on how public education spending (a substantial part of government consumption) is actually distributed. An allocation proportional to post-tax disposable income is clearly rejected, while a lump-sum allocation is found to provide a good approximation. Keywords Inequality · Redistribution · Education · In-kind transfers JEL Classification D31 · H41 · H52 · I24 We thank the editor David Agrawal, two anonymous referees, Christina Gathmann, Valentina Melentyeva, Sebastian Siegloch, Michaela Slotwinski, and David Splinter as well as seminar participants at Mannheim, Strasbourg, and ZEW, and conference participants at ECINEQ, IIPF, and Verein für Socialpolitik for valuable comments and suggestions. Hanne Albig and Lena Göhringer provided excellent research assistance. * Holger Stichnoth 1 ZEW Mannheim, Mannheim, Germany 2 University of Strasbourg, Strasbourg, France 3 IZA Bonn, Bonn, Germany 4 Research Group Inequality and Public Policy, ZEW Mannheim, L7, 1, 68161 Mannheim, Germany 13 Vol.:(0123456789) L. Riedel, H. Stichnoth 1 Introduction The United States and many other countries have seen an increase in income inequality in recent decades that has received attention from academic researchers and the general public alike. However, while there is a broad consensus about the increase, there is a debate about its extent, in particular for post-tax income, i.e., income after taxes, transfers, and government expenditure (Auten & Splinter, 2024; Bricker et al., 2016; Larrimore et al., 2021a; Piketty et al., 2018; Saez & Zucman, 2020; Splinter, 2020). The present paper contributes to this debate by showing that the level of post-tax inequality is fairly sensitive to assumptions regarding the allocation of government expenditure, and by providing evidence on the actual distribution of public education spending, an important part of government expenditure. The measurement of income inequality has traditionally relied on micro-data from surveys or administrative tax records. These data, however, capture only about 60% of macro totals from national accounts, so a substantial share of national income has been missing from the debate about inequality. In an important contribution, Piketty et al. (2018) propose a method for constructing distributional national accounts (Dina) that measure how the entire national income is distributed among individuals. When computing post-tax income, this approach requires the allocation of the entirety of government expenditure to individuals. In recent years, about half of government expenditure in the United States has taken the form of government consumption (e.g., education, defense, infrastructure); depending on the year, this represents between 16% and 20% of national income.1 In their main specification, Piketty, Saez, and Zucman assume that government consumption is distributed proportionally to post-tax disposable income, which corresponds to pre-tax income minus all taxes plus all individualized monetary transfers, but excluding in-kind transfers. This means that, by construction, an important part of national income is assumed to be distributionally neutral. The Dina Guidelines (Alvaredo et al., 2020) explicitly recognize the difficulty surrounding the allocation of government consumption, calling it “approximate and exploratory.” As shown by Blanchet et al. (2022), Bozio et al. (2022), and Bruil et al. (2022), the level of post-tax inequality is fairly sensitive to this assumption. We confirm this for the US study by Piketty, Saez, and Zucman. When we replace their proportionality assumption with a lump-sum allocation, the Top 10% share of national income decreases by about 5 percentage points, while the share of the Bottom 50% increases by roughly the same amount.2 1 See Appendix 1 for the definition and measurement of government consumption. Piketty et al. (2018) themselves present a robustness check along these lines. However, they only allocate education spending on a different basis, not the remaining parts of government consumption. Moreover, they assign public education spending based on the number of children in the tax unit. This means that spending on tertiary education is typically allocated to the parents who claim their children as exemptions. As a result, the allocation is more regressive than when allocating the expenditure to tax units of the students themselves, as we do in the present paper. Both approaches have their merits. However, we believe that allocating public education expenditure to the parents is a departure from the rest of their paper, in which they allocate all items of national income to tax units without taking economic links between these units into account. We will return to this point below. Finally, their robustness check does not take differences in per-capita expenditure between the different education levels into account. 2 13 Government consumption in the DINA framework: allocation… As a result, the gap between the income shares of the Top 10% and the Bottom 50% is reduced by half, from about 20–10 percentage points in the most recent years.3 In light of this sensitivity, the contribution of the present paper is to provide direct evidence on how an important fraction of government consumption is actually distributed in the United States. We focus on public spending on education, which makes up about 30% of government consumption and 5% of national income in most OECD countries, and is much easier to assign individually than defense or infrastructure expenditure. Our paper is part of a series of recent studies on the allocation of in-kind transfers in the Dina framework (Insee 2021 for France, Bruil et al. 2022 for the Netherlands, Chatterjee et al. 2023 for South Africa, and De Rosa et al. 2022 for Latin America). Our data for the United States are from the 2017 wave of the American Community Survey (ACS). In addition to the large sample size (about 3.2 M individuals in 1.4 M households), the ACS has the advantage that participants are legally obligated to answer the survey questions. The ACS has information on whether household members are currently in education, and, importantly for our purpo (...truncated)