Understanding Changes in the Distribution and Redistribution of Income: A Unifying Decomposition Framework

17 Pages Posted: 26 May 2016

See all articles by Nicolas Herault

Nicolas Herault

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Francisco Azpitarte

Melbourne Institute of Applied Economic and Social Research & Brotherhood of St Laurence

Date Written: June 2016

Abstract

In recent decades income inequality has increased in many developed countries but the role of tax and transfer reforms is often poorly understood. We propose a new method allowing for the decomposition of historical changes in income distribution and redistribution measures into: (i) the immediate effect of tax‐transfer policy reforms in the absence of behavioral responses; (ii) the effect of labor supply responses induced by these reforms; and (iii) a third component allowing us to explore the effect of changes in the distribution of a wide range of determinants, including the effect of employment changes not induced by policy reforms. The application of the decomposition to Australia reveals that the direct effect of tax‐transfer policy reforms accounts for half of the observed increase in income inequality between 1999 and 2008, while the increased dispersion of wages and capital incomes also played an important role.

Keywords: income inequality, labor supply, progressivity, redistributive effect, taxes and transfers

JEL Classification: D31, H23, J22

Suggested Citation

Herault, Nicolas and Azpitarte, Francisco, Understanding Changes in the Distribution and Redistribution of Income: A Unifying Decomposition Framework (June 2016). Review of Income and Wealth, Vol. 62, Issue 2, pp. 266-282, 2016, Available at SSRN: https://ssrn.com/abstract=2784060 or http://dx.doi.org/10.1111/roiw.12160

Nicolas Herault (Contact Author)

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

HOME PAGE: http://www.findanexpert.unimelb.edu.au/researcher/person125238.html

Francisco Azpitarte

Melbourne Institute of Applied Economic and Social Research & Brotherhood of St Laurence ( email )

Level 5, FBE Building, 111 Barry Street
111 Barry Street, University of Melbourne
Melbourne, 3010
+61 3 9035 3414 (Phone)
+61 3 8344 2111 (Fax)

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