2. LIMITS---without a tether to taxation, ANY government policy can have redistributive effects. Only fiscal redistribution focuses the debate.

In dictionaries, redistribution is defined as “to alter the distribution of” something.2 This is a useful starting point: what follows is that income redistribution policies encompass all government interventions that alter the distribution of incomes, including those that affect the primary distribution of incomes. As argued in Part II of this volume, granting collective bargaining rights (or denying them) has consequences for the functional distribution of incomes and for wage inequality, as do minimum wages. However, governments alter the primary distribution of incomes in other, often even less visible ways. For instance, the liberalization of financial markets since the 1980s is widely believed to have contributed to a concentration of incomes at the top, and to a shift away from wages and towards profits (see Stiglitz, 2012; ILO, 2012). Likewise, trade liberalization has differential impacts on the incomes of various groups in society (see Jansen and Lee, 2007). Such a broad definition of redistribution underlines the fact that most government action has redistributive consequences. To gain support for unpopular decisions such as the opening of trade, governments sometimes try to compensate the losers and impose a corresponding tax on the winners (ibid.). At this stage, redistribution becomes more apparent since it directly alters the primary distribution of incomes. This direct intervention in the form of taxes and transfers is commonly at the heart of public debates over redistribution, simply because it is more visible, even though the impact can be minuscule when compared the original policy decision. For example, trade compensation schemes are commonly thought to redistribute less than 5 per cent of the gains from trade (ibid.: 75). The concept of fiscal redistribution captures these direct interventions that governments make through taxes and transfers. A key policy concern is often their net effect on income inequality, usually expressed as the change in a summary measure such as the Gini coefficient between the primary and secondary distribution. The impact can be further disaggregated into the direct effect of taxes and mandatory social contributions and the contribution of transfers (see section 6). Tax policies play a crucial role for both aspects: They determine how much resources are at the disposal of governments for social policies, but the structure of the tax code by itself has an impact on inequality. At one extreme, income taxes can be regressive, i.e. the tax rates are lower for those with higher incomes. An example for a tax that widens inequality is the ‘poll tax’, an equal lump sum paid by every resident. However, although the top marginal tax rates have fallen substantially across the industrialized world since the 1970s, modern tax systems are still typically progressive and tax rates increase with incomes. 3 The result is that the rich pay (or are expected to pay) a greater share of their income as taxes, and that inequality after taxes is lower than before taxes. Between these two models lie distribution-neutral regimes with flat tax rates, where everybody pays the same proportion of her or his income in tax.