CHAPTER 7
Figure 7.11: Governments reduce inequality more in Europe (Gini coefficients of income inequality before and after taxes and transfers for mid-2000s)
Source: OECD Income Distribution and Poverty Database.
suggest that the impact of Europe’s public spending and taxation is more redistributive than in the Anglo-Saxon countries or Japan (figure 7.11; see figure 1.15 in chapter 1). As a result, the income distribution (after taxes and transfers) is more equal in the north, the center, and the EU12 (not in the south) than in the Anglo-Saxon countries and Japan. Atkinson, Piketty, and Saez (2011) argue that this greater equality is also related to Europe’s greater ability to ensure that households at the top of the income distribution contribute adequately to government finances. For example, while the share of the top 1 percent of households in total after-tax earnings remained unchanged over the last four decades at about 11 percent in Germany, it increased from 9 percent to 20 percent in the United States.
Big, high-quality government A fairly consistent pattern emerges from the analysis in this chapter. Big government is systematically correlated with better quality of government, with two exceptions: collective wage bargaining and tax rates. This holds both for the world sample and for Europe. It holds also for all five dimensions of government quality. And it holds in most cases, even when we control for basic economic, political, and geographic determinants of institutions (table A7.6). · Big government is associated with better enforcement of property rights, better regulation, and more independent judiciaries in both the world sample and Europe. Big governments come with more centralized collective bargaining, though there is no correlation with dismissal cost of workers in Europe. In addition, while tax compliance costs are not related to government size, income tax rates are higher in countries with big government. Clearly, for both labor markets and taxes, it is necessary to look at how systems work as a whole, country by country. · Big government is related to economic globalization elsewhere, but not in Europe. Tariffs go up with government size generally, but not in Europe, perhaps because of the EU’s common external tariff. In Europe, countries’ trade shares are not related to government size.
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