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Understanding Changes in the Distribution and Redistribution of Income: A Unifying Decomposition Framework
Author(s) -
Herault Nicolas,
Azpitarte Francisco
Publication year - 2016
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/roiw.12160
Subject(s) - economics , redistribution (election) , income distribution , inequality , distribution (mathematics) , redistribution of income and wealth , labour economics , capital income , economic inequality , tax reform , international taxation , macroeconomics , public economics , unemployment , mathematical analysis , mathematics , politics , political science , law
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.