Redistribution and insurance across the lifecycle
This study used data on the baby-boom generation (born 1945–54) to look at how taking a lifetime – rather than a single-year snapshot – perspective changes our view of inequality, redistribution and reforms to the tax and benefit system.
Taking adult life as a whole, 93% of individuals pay more in taxes than they receive in social security. This compares with 64% of individuals when measured in a single year. These figures include most personal taxes and benefits, but do not take into account ‘business taxes’ or the benefits from public service spending.
More than half of the redistribution achieved by taxes and benefits is effectively across periods of life rather than between different people, in the sense that the tax and benefit system takes from an individual at one age and gives back to the same individual at another.
Income inequality is much lower from a lifetime perspective than a single-year perspective. The Gini coefficient – a common measure of inequality – for gross income is 0.49 in a single year compared with 0.28 across the whole of adult life. This indicates that a lot of the inequality between individuals is temporary in nature, reflecting either the stage of life they are at or some short-lived shock to income, such as a period of unemployment.
The tax and benefit system is less effective at reducing inequality over the lifetime than within each year. In the single-year snapshot, the tax and benefit system reduces the Gini coefficient by 31% but over the lifetime only by 15%. This is because much of what it takes at one age is returned to the same individual at another age. Its effectiveness at targeting lifetime outcomes is limited by the fact that most taxes and benefits are assessed over periods of a year or less, making the targeting of outcomes over short horizons much easier than over longer horizons.
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