() and Mårten Palme
Anders Björklund: Swedish Institute for Social Research, Postal: Stockholm University, S-106 91 Stockholm, Sweden
Mårten Palme: Dept. of Economic Statistics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden
Abstract: The generalised entropy measure is applied to decompose overall income inequality over several years into one part showing inequality of long-run (permanent) income and one part showing variability of single individuals' incomes over time. By comparing these components of inequality for pre- and post-tax and benefit incomes, we get an estimate of how the welfare state affects two conceptually different components of income inequality. Using Swedish panel data covering 18 years, we find that income taxes primarily affect the distribution of long-run income. Although the main effecty of benefits is on smoothing intertemporal income variability, we also find an equalising impact on long-run income of benefits. Income variability is highest among those with low long-run income and the equalising effect of taxes and transfers within the life cycle is also largest in this group.
27 pages, September 29, 1997
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