Redistribution Policy and Inequality Reduction in OECD Countries

We use a range of data sources to assess if, and to what extent, government redistribution policies haveslowed or accelerated the trend towards greater income disparities in the past 20-25 years. In mostcountries, inequality among “non-elderly” households has widened during most phases of the economiccycle and any episodes of narrowing income differentials have usually not lasted long enough to close thegap between high and low incomes that had opened up previously. With progressive redistribution systemsin place, greater inequality automatically leads to more redistribution, even if no policy action is taken. Wefind that, in the context of rising market-income inequality, tax-benefit systems have indeed become moreredistributive since the 1980s but that this did not stop income inequality from rising: market-incomeinequality grew by twice as much as redistribution. The redistributive strength of tax-benefit systemsweakened in many countries particularly in the most recent decade. While growing market-incomedisparities were the main driver of inequality trends between the mid-1980s and mid-1990s, reducedredistribution was often the main driver in the ten years that followed. Benefits had a much stronger impacton inequality than social contributions or taxes, despite the much bigger aggregate size of direct taxes. As aresult, redistribution policies were often less successful at counteracting growing income gaps at thebottom in the top half of the income distribution.