Where Income becomes Wealth: How Redistribution Moderates the Association between Income and Wealth

This article studies the role of redistributive policy in comparative research on the determinants of wealth. We argue that public redistribution impacts the level of net wealth by moderating the household-level association of income and wealth. Drawing on microdata for 14 countries from the Luxembourg Wealth Study, and spending and revenue data from the OECD, we employ OLS models with country fixed effects. We find a positive moderation effect of social spending and a negative moderation effect of income taxation. Higher/lower labor incomes translate into higher/lower levels of wealth where income taxation is lower or social spending is higher. We complement our findings with panel information from the U.S, providing further evidence supporting our cross-national results. In summary: public redistribution partially accounts for differences in the association of income and wealth across countries. We urge future research on the correlation of income and wealth to take public redistribution into account.