Income inequality and the stabilising role of the tax and transfer system in times of crisis

Thesis: Aggregate crises often bring tremendous economic disruptions, which may persist for many years. Understanding their consequences and how to effectively design crisis-coping policies is therefore of capital importance. The aggregate effects of crises and the stabilising role of macroeconomic policies have been significantly studied in the literature. Much less attention, however, has been given to the distributional effects of crises and even less to the possible interactions between these effects and the post-crisis evolution of aggregate outcomes. If a crisis-led increase in inequality can feedback into an anemic recovery of economic activity, then the tax and transfer system may have a role in stabilising not only the income distribution but also the macroeconomy. Understanding how the system may affect both distributional and aggregate developments in a crisis aftermath is therefore key. This thesis aims at shedding new light on these issues, using multiple methodologies and datasets both at the micro and macro level, applying both an empirical and theoretical approach.The first paper provides a detailed assessment of the evolution of income inequality and the redistributive effects of the tax and transfer system following the 2007-2008 crisis, in the US. Using a wide range of indicators, it looks at several sections of the income distribution and analyses the contribution of different components of the tax and transfer system. The second paper develops a new method to model the household disposable income distribution and decompose changes in this distribution over time, integrating both a microeconometric and microsimulation approach. It applies the method to the study of changes in the income distribution in Portugal following the 2007-2008 crisis, accounting for the effects of the crisis and of the aftermath fiscal stimulus and consolidation policies. The third paper develops a theoretical heterogeneous agents DSGE model, with both ex-ante and ex-post household heterogeneity and unemployment insurance. It presents the results of a first quantitative experiment, studying the distributional and aggregate effects of a crisis and the role of unemployment insurance in shaping these effects, under several hypothetical crisis scenarios.Several conclusions can be drawn from the results obtained in this thesis. First, aggregate crises may have substantial heterogeneous effects across the income distribution, being particularly penalising for lower income groups, and these effects may be highly persistent. Second, the tax and transfer system can crucially shape distributional developments following a crisis. A strong tax and transfer system may fully cushion a crisis-led increase in inequality, while a weak one may deepen it. Beyond the effects of automatic stabilisers, discretionary policy choices may have substantial effects. Third, not only the size but also the design of the tax and transfer system matters for its role in times of crisis. In particular, a more progressive instrument will have a higher stabilising effect than a flat one, both at the distributional and aggregate level. Fourth, policies aimed at stabilising aggregate outcomes in times of crisis may have significant "collateral" effects on the income distribution. In particular, the implementation of consolidation measures may reinforce income losses induced by the contractionary effects of the crisis and increase the heterogeneity of the effects of a crisis on households' incomes. Finally, household heterogeneity and social insurance matter for the transmission of an aggregate crisis to aggregate outcomes. A crisis will lead to a higher contraction of aggregate consumption in a world where there are both ex-ante and ex-post sources of household heterogeneity than in a world where there is only ex-post heterogeneity. Furthermore, a crisis will imply a smaller contraction of aggregate consumption in a world with social insurance than in a world without.

Author(s)

Vanda Guimaràes de Almeida Almeida

Date of publication
  • 2019
Keywords
  • Crisis
  • Inequality
  • Tax and transfer system
  • Redistribution
  • Income and wealth distribution
  • Macroeconomic stabilisation
  • Inequality decomposition
  • Microsimulation
  • Heterogeneous agents DSGE models
  • Euromod
  • Social insurance
  • Unemployment insurance
  • Fiscal stimulus
  • Fiscal consolidation
Issuing body(s)
  • École des hautes études en sciences sociales (EHESS)
Date of defense
  • 03/12/2019
Thesis director(s)
  • Romain Rancière
Pages
  • 200 p.
Version
  • 1