Four Levers of Redistribution: The Impact of Tax and Transfer Systems on Inequality Reduction

We use harmonized survey data from the Luxembourg Income Study to assess the redistributive impact of taxes and transfers across 22 OECD countries over the 1999–2016 period. After imputing missing tax data (employer social‐security contributions), we measure the reduction in income inequality from four key levers of tax and transfer systems: the average tax rate, tax progressivity, the average transfer rate, and transfer targeting. Our methodological improvements produce the following results. First, tax redistribution dominates transfer redistribution (excluding pensions) in most countries. Second, targeting explains very little of the cross‐country variation in inequality reduction. In contrast, both tax progressivity and the average tax rate have large impacts on redistribution. Last, there seem to be political tradeoffs: high average tax rates are not found together with highly progressive tax systems.