The Gini coefficient is a widely used measure of income inequality, with countries with a low score recording a lower level of inequality. The best performing countries are dominated by the Nordics and Central/Eastern Europe, with Europe as a whole tending to do much better than the United States.

It’s often argued that this is because of the weaker welfare state in the US, but recent research from the Paris School of Economics explores whether this narrative really stacks up. The researchers argue that the greater inequality evident in the US is not because of insufficient wealth transfer and more to do with greater pretax inequality.

Causes of inequality

The researchers compare inequality in twenty six European countries with that of the United States since 1980. This confirms that inequality is significantly higher in the US than it is in Europe. This trend has widened since the start of the data period, where inequality levels were broadly comparable.

This is largely not the result of taxes and wealth transfers, despite government spending being lower in the US and therefore lower-income groups receiving lower transfers. For instance, 13% of the income of the poorest 50% is in the form of some kind of public spending in the US, compared to 18% in France and 23% in Denmark.

Taxes are also more progressive in the US, however, with indirect taxes significantly lower than in Europe. By contrast, social contributions are a more important factor in Europe, and these are often either flat or regressive in nature. As a result, the researchers argue that the tax-and-transfer system in the US is actually more effective at reducing inequality than in Europe.

Indeed, the net transfer received by the poorest half of the population was equivalent to roughly 6% of national income compared to around 4% in Denmark and just 1% in Spain. As a result, government redistribution isn’t the reason for the high inequality in the US.

As a result, the researchers argue that while things like social spending and progressive taxation can play a crucial role in reducing poverty and inequality, they’re not enough on their own to explain the differences seen between countries. Indeed, it’s likely to be impossible to redistribute one’s way out of inequality.

Instead, it is important to take account of “predistribution” factors, such as unionization rates, labor market regulation, and access to healthcare and education, as each of these plays a much bigger role in inequality levels.