Answer:
Taxes and transfers reduce inequality in disposable income relative to market
income. The effect varies, however, across OECD countries. The redistributive
impact of taxes and transfers depends on the size, mix and the progressivity of each
component. Some countries with a relatively small tax and welfare system
(e.g. Australia) achieve the same redistributive impact as countries characterised
by much higher taxes and transfers (e.g. Germany) because they rely more on
income taxes, which are more progressive than other taxes, and on means-tested
cash transfers. This article provides an assessment of the redistributive effect of the
main taxes and cash transfers, based on various OECD data sources, a set of policy
indicators and a literature review. Using cluster analysis, it also identifies
empirically four groups of countries with tax and transfer systems that share
broadly similar features.
JEL Classification: H2, H23, H53, I3, I38
Keywords: Income inequality, taxes, transfers, welfare systems, redistribution,
progressivity, cluster analysis
Explanation:
