Unveiling Global Trends: Taxes, Transfers, and the Battle Against Inequality

  • From Xhulia Likaj
  • Reading duration 3 min

In the ongoing quest to understand and address global inequality, a recent study form the World Inequality Lab has shed light on the impact of government taxes and transfers worldwide. Despite increased attention to inequality, recent studies have frequently neglected the distributional effects of these fiscal measures. This gap in knowledge has made it challenging to assess which countries are effectively reducing income disparities and whether redistribution efforts have evolved over the past decades.

In a significant effort to tackle these questions, the authors of the study have taken a significant step forward. By combining new data sources and innovative methodologies, they have compiled a comprehensive database covering 151 countries since 1980. This database provides a detailed analysis of the distribution of taxes and transfers, encompassing personal income taxes, corporate taxes, consumption taxes, local taxes, cash transfers, and public education and health expenditure.

The findings of this study reveal five key insights into worldwide fiscal progressivity:

  1. Universal Impact of Tax-and-Transfer Systems: Across the globe, tax-and-transfer systems consistently reduce inequality. Comparing the average income ratio of the top 10% to the bottom 50% in terms of both pre-tax and post-tax income, the study finds a substantial reduction in this ratio in all 151 countries, ranging from 15% in the average African country to over 30% in Europe and the United States.
  2. Dominance of Transfers: The study highlights that transfers play a pivotal role in the redistributive effect, overshadowing the impact of taxes. While taxes show minimal effect on inequality in most regions, transfers consistently reduce inequality by about 20%, with over 90% of the overall impact of tax-and-transfer systems attributed to transfers.
  3. Development and Redistribution: Contrary to expectations, redistribution increases with development, primarily due to the rise in transfers. Tax progressivity is not strongly correlated with per capita income, revealing notable regional variations. For instance, Western European and Anglosphere countries exhibit slightly progressive tax systems, while Eastern Europe and Latin America show regressive distribution, primarily due to high indirect taxes and less progressive personal income taxes.
  4. Lack of Cross-Country Convergence: While the net effect of taxes and transfers on inequality has increased globally, there is no uniform trend. Redistribution has surged in Western Europe, the Anglosphere, and Latin America but stagnated in Eastern Europe and Africa. The gap in redistribution between low- and high-income countries has remained relatively constant, with upper-middle-income countries catching up due to fiscal progressivity in China.
  5. Pretax Inequality’s Dominance: Despite significant differences in tax-and-transfer systems, variations in inequality are primarily driven by pretax inequality or "predistribution." Countries with higher levels of pretax inequality also exhibit higher levels of posttax inequality. While redistributive policies play a crucial role, they explain less than 20% of cross-country variations in inequality, emphasizing the significant impact of pretax conditions.

Read the full study.