Alt solves the case better – policy measures designed to affect pre-tax distributions of income are empirically more effective than redistributive measures

Antoine Bozio, Bertrand Garbinti, Jonathan Goupille-Lebret, Malka Guillot, and Thomas Piketty, “Predistribution vs. Redistribution: Evidence from France and the U.S.,” World Inequality Lab, 29 October 2020, pp. 33-34, https://wid.world/document/predistribution-vs-redistribution-evidence-from-france-and-the-u-s/.

To summarize our main results, pretax income inequality appears to be the main factor to account for differential level and trend in inequality between France and the U.S. over the 20th century. Redistribution plays an important role today in reducing post-tax inequalities in both the U.S. and France, by 43-44% using our benchmark measure of the ratio T10/B50. But this reduction of inequalities by direct redistribution has only contributed for a quarter of the total change in inequalities over the period.

An inadequate take-away would be that the non-monetary transfers (e.g., education spending, public goods) have only a very small impact on the evolution of inequality within country or on the differences in inequality across countries. We believe, on the contrary, that our analyses highlight that a large set of policies can have an impact on pre-tax inequality (within country and over time) that would not be captured with the usual concept of redistribution because this analytical tool can only capture direct redistribution from a given pre-tax income inequality. In capturing redistribution, it misses “predistribution”.

Generally speaking, one can define predistribution as the set of policies that can affect the distribution of pretax income. This includes potentially a large set of policies and institutions, including the education system (particularly the inequality in education spending across social groups), labor market regulations (e.g., the level of the minimum wage and the various legal rules affecting the role of unions and the bargaining power of workers), and other policies affecting the distribution of primary assets and capabilities (including the health care system, the inequality of wealth and inheritance, etc.). The tax system has also an influence on pre-tax income: first, because taxes are needed to pay for publicly funded education and other public policies, second because taxation can lead to behavioral responses affecting labor and capital income, and third because progressive taxation of income and wealth can also affect the formation of top end compensation packages and wealth inequality (see e.g., Piketty, Saez and Stantcheva 2014; Piketty 2014; Piketty, Postel-Vinay and Rosenthal 2018).

Needless to say, we are unable in the context of the present paper to identify the exact role played by predistribution to account for differential level and trend in pretax inequality between France and the U.S. However, our findings clearly show that differences in post-tax income inequality between the two countries are explained by differences in pretax inequality rather than differences in redistribution. This implies that research and policy discussions should, in the future, focus on predistribution as much as on redistribution. In particular, a greater attention should be devoted to the study of the various policies and rules that can account for the fact that pretax inequality is so much larger in the U.S. than in France.

Section 6. Conclusion

In this paper, we have presented post-tax Distributional National Accounts (DINA) for France. That is, we have combined national accounts, tax and survey in a comprehensive and consistent manner to build homogenous annual series on the posttax, post-transfer distribution of national income by percentiles over the 1900-2018 period, with detailed breakdown by age, tax and transfer categories over the 1970- 2018 period.

Our main conclusion is that changes in pretax inequality levels seem to play the central role in explaining the long-term evolution of the distribution of post-tax income in France. The same conclusion also applies if one attempts to account for the difference in inequality levels between France and the United States. These findings suggest that policy discussions on inequality should in the future pay more attention to policies affecting pretax inequality and should not focus exclusively on “redistribution” (i.e., redistributive taxes and transfers, for a given level of pretax inequality).