Income inequality, whether measured before or after taxes has been rising over the last 40 years in the U.S. as shown below. The wealthiest 1 percent have seen their share of income increase to 21 percent pretax and 16 percent post-tax.
Europe has also seen an increase in inequality however, the increase is less, and income inequality remains way below U.S. levels.
Traditional explanations have suggested that Europe redistributes a greater share of income to the poorest citizens. However, a new paper by economists Blanchet, Chancel, and Gethin (https://www.aeaweb.org/articles?id=10.1257/app.20200703) turns this thinking on its head. The U.S. tax and transfer system are actually much more progressive than in Europe. The bottom 50 percent of income earners in the U.S. receive a net transfer of 6 percent of national income compared to 4 percent in Western Europe. The bottom 50 percent pretax income share in the U.S. is 12.7 percent which rises to 19.8 percent after transfers. The equivalent numbers in Europe are 21.4 percent to 24.9 percent. In other words, the gap between the U.S. and Europe narrows from 8.7 percentage points pretax to 5.1 percentage points post-tax.
If redistribution does not explain Europe’s lower income inequality, what can? The authors suggest Europe does a much better job ensuring low-income groups benefits from relatively well-paying jobs. The average pretax income of the bottom 50 percent in the U.S. is about $12,300 but in Western Europe, it is $14,600 and in Northern Europe, it is $21,600.
