The impact of taxes and transfers on inequality

Policy Brief No.4

In many countries, income inequality has risen significantly over the past decades. Both greater wage inequality and a rising share of profits in national income (matched by a fall in the wage share) have contributed to a more unequal distribution of market incomes. However, social security transfers usually benefit the poor disproportionately, while the rich often pay a larger share of their incomes in taxes. In sum, tax and transfer systems can reduce inequality substantially – as demonstrated by European countries such as Sweden or the Netherlands.

However, the redistributive impact of taxes and transfers is far smaller in other parts of the world. This Policy Brief discusses in how far policy- makers have made use of these tools, and presents an overview of trends across time and differences between countries and regions.