Essays on income inequality, poverty and the evolution of top income shares

This dissertation on income inequality in Finland consists of an introduction and four self-contained essays on trends in the share of top incomes, economic poverty, regional income inequality and tax progressivity. In all these essays the distribution of economic wellbeing is considered empirically over a forty-year period using Finnish Income Distribution Surveys and Consumption Surveys produced by Statistics Finland. Over this period the development of disposable income has been quite different that seen previously. The period of equalization from the mid 1960s to the mid 1990s has been reversed, coinciding with the economic recovery starting in late 1990s. In the first essay it is shown that the share of top incomes has increased over the last ten years and that the increase in disposable income was concentrated within the top one per cent. The main factor that has driven up the shares of top incomes in Finland since the mid 1990s is an unprecedented increase in the share of capital income. The 1993 Finnish tax reform is one of the key factors responsible for this trend. The differential taxation of labour and capital income created a situation where the share of top capital income increased and progressivity declined. The relative poverty rate has increased over the same period whilst top incomes have soared. The second essay considers economic poverty. Poverty rates increased from the mid 1990s to 2006 regardless of the poverty line. The composition of the poor has changed significantly and the biggest change is the major deterioration in the position of unemployed households. Another vulnerable group is families with small children. The third essay examines regional convergence between regions and inequality within regions. There was substantial regional convergence in relative income levels from 1966 to the mid 1980s. Since then relative regional disparities have remained constant. The inequality within regions follows the same U-shaped pattern over the period as inequality in the whole country. The relative differences between regions have diminished and income inequality between people has become the dominant feature of the overall income distribution. The fourth essay considers tax progressivity more closely and introduces the decomposition of the progressivity measure. The decomposition of the progressivity measure by income deciles focuses on changes in the tax treatment of income deciles from the mid 1990s to 2004. The changes in the decile shares of before-tax and after-tax income among those in the highest before-tax income deciles are the main factors that lie behind the recent decrease in tax progressivity, and play an important role in explaining the recent surge in inequality.