Income inequality before taxes in France is far lower than in the United States but perhaps surprisingly, the redistributive impact of French taxes and transfers on reducing inequality is less. That is one of the findings of new research by Antoine Bozio, Bertrand Garbinti, Jonathan Goupille-Lebret, Malka Guillot and Thomas Piketty, to be presented at the Royal Economic Society's annual conference at the University of Warwick in April 2019.
Nevertheless, their analysis shows, the redistributive power of the French system increased significantly from the early 1990s. The increased progressivity of the system came mostly from reductions in social security contributions for the bottom 50% of individuals and tax increases for the top 10%. But in the past couple of years, progressivity has fallen back somewhat with the reform of the wealth tax and the creation of a flat tax for capital incomes.
The new study analyses the impact of taxes and transfers on income inequality in France and compares it with the US tax and transfer system over the period from 1990 to 2018. The authors combine tax data, national accounts and survey data and, for the first time, take account of all taxes, contribution and transfers over this period.
Maybe surprisingly, over the 1990-2018 period, taxes and transfers have contributed more to reducing inequality in the United States than in France. Indeed, they reduce total income inequality by 23% on average in France over this period (as measured by the ratio between average incomes of the top 10% and bottom 50% groups). This is significant, but less than in the United States (34%).
It turns out that overall inequality in France is half that in the United States (according to this indicator) because of differences in pre-tax inequality (which can themselves be attributed to a complex combination of factors: access to and financing of education and other skill-enhancing services; access to and organisation of the healthcare system; institutions affecting wage formation processes, including minimum wage, role of unions, etc.) rather than in secondary redistribution (that is, policies affecting the gap between the pre-tax distribution and the post-tax, post-transfer distribution of income).
Over the whole period, however, the redistributive power of the French system has increased significantly, reducing inequality from 17% in the 1990s to 30% nowadays. This increased progressivity of the system comes mostly from reductions in social security contributions for the bottom 50% of individuals and tax increases for the top 10%.
This trend has counteracted the increase in pre-tax inequality, leading to a relatively constant level of disposable income inequality in France, in contrast with the US situation, where the more modest increase in progressivity has not matched the dramatic increase in pre-tax inequality.
In France, the overall profile of taxation is only mildly progressive. This is due to the large role of indirect taxes, social contributions and income capital exemptions, which lead to high level of taxation for both low income and top income groups.
The progressivity of the tax system peaks in France for the top 1% group, and becomes regressive for the highest income shares (that is, very top groups pay lower effective tax rates than groups just below them). This top-end regressivity of the French tax system was temporary halted in the period 2013-2016, but it reappeared in 2017-2018 with the reform of the wealth tax and the creation of a flat tax for capital incomes.
Finally, monetary transfers benefit mostly older age groups in France, and leave unaffected the low relative position of younger age groups. Monetary transfers represent about 4% of national income in France throughout the 1990-2018 period. On average, monetary transfers received by bottom 50% incomes represent approximately 7% of average national income, and about 2-3% of average national income for the upper income groups (shares that again are relatively stable over the 1990-2018 period).
These series are currently being extended to cover the entire 1900-2018 period.
‘Inequality and Redistribution in France, 1990-2018: Evidence from Post-Tax Distributional National Accounts (DINA)’ by Antoine Bozio, Bertrand Garbinti, Jonathan Goupille-Lebret, Malka Guillot and Thomas Piketty