Mobility and the lifetime distributional impact of tax and transfer reforms
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Mobility and the lifetime distributional impact of tax and transfer reforms Peter Levell1 · Barra Roantree2,3 · Jonathan Shaw4 Accepted: 28 August 2020 © The Author(s) 2020
Abstract This paper examines the lifetime distributional impact of changes to the tax and transfer system. We find that—in contrast to standard snapshot analyses—increases to work-contingent benefits are just as effective at redistributing resources to the lifetime poor as increases to out-of-work benefits. This has important implications for the equity-efficiency trade-off typically thought to apply to work-contingent transfers. We also show that increases to higher rates of income tax are an effective way of targeting the lifetime rich because higher earners tend to exhibit greater persistence in their incomes. Our results illustrate the importance that moving beyond an exclusively snapshot perspective can have when analysing tax and transfer reforms. Keywords Inequality · Redistribution · Income mobility JEL codes D31 · H20 · H24
* Barra Roantree [email protected] Peter Levell [email protected] 1
Institute for Fiscal Studies, London, UK
2
Economic and Social Research Institute, Dublin, Ireland
3
Trinity College Dublin, Dublin, Ireland
4
Financial Conduct Authority, London, UK
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1 Introduction The distributional impact of tax and transfer reforms plays a central role in policy debates. This is typically assessed by comparing the gains and losses across different income groups: reforms are classified as progressive if they result in a greater proportional gain (or a smaller proportional loss) for households with low incomes, and regressive if the converse is true.1 However, such analyses suffer from an important limitation: the incomes used to rank households—and the changes in transfer entitlements or tax liabilities—are usually snapshot measures derived from cross-sectional data. These could provide a poor guide to the distributional implications of reforms because snapshot incomes are not always a good proxy for well-being. Individuals’ circumstances often vary a great deal across life, and resources can be transferred across periods of life through borrowing and saving. As a result, well-being may be better measured using longer-run income measures (see, for example, Aaberge and Mogstad 2015; Bönke et al. 2015). In this paper, we contrast the snapshot and lifetime distributional impacts of two sets of reforms, one targeting the bottom of the distribution and the other targeting the top. At the bottom, we investigate reforms to the working-age benefit system that have played an important role in the policy response to widening inequality (Blundell 2006): an expansion in work-contingent transfers (like the EITC in the United States) and an increase to out-of-work benefits (like jobseekers benefit in most European economies). It has been well-established that work-contingent transfers are an extremely effective means of reducing poverty (especially among children: Sherman 20
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