IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
Germany Income per capita is not only high in Germany, it is also relatively equally distributed in the population. OECD data indicate that only a few small countries have income both higher and more equally distributed than Germany. In other large European countries like France, UK, Italy or Spain, income is lower (on average) and more unequally distributed. This international comparison suggests that higher income does not have to result in higher inequality. A contributing factor to this could be that state institutions of a higher quality can positively influence not only the wealth of a nation, but also redistribute it during slow growth.
One hears only rarely any calming voice on the topic of inequality. More typical are studies such as that published by IMK on behalf of the Hans Bockler Foundation, according to which inequality greatly increased between the Reunification and the year 2010. More recently it has stagnated at a high level, according to a DIW report from this June.
And yet, in spite of these reports, income inequality (after taxes and benefits) was in 2012 (the latest data available) lower than in Germany only in 12 of the 31 OECD countries. The German government is strong in smoothing out income differences. None of the large countries is richer and more equal than Germany.
The chart below shows the situation in OECD countries regarding the per capita income (in purchasing power parity terms) in 2014 and the Gini coefficients after taxes and benefits in 2012. (Gini coefficient measures the degree of inequality on a scale 0 (everyone has the same income) to 1 (all income is concentrated with a single person).
Most countries (13 in all) are in the red region where per capita income is lower than in Germany and more unequally distributed (after taxes and benefits). Chief among them are France, Italy, UK or Turkey. The second region (marked orange) also has lower income but distributes it more equally. For example, in the Czech Republic the Gini of 0.256 was lower than German 0.289, but per capita income stood at around $30,000, about a whole third below Germany. Then there are countries like Australia, Ireland and the USA in the blue region where income is higher than in Germany, but also more unequally distributed.
Only seven countries, all with relatively small populations, show up in the green region where average income is higher and inequality lower than in Germany. In this group we can find for example Sweden or Denmark, both with smaller population than some of the larger German
federal states. Only Bavaria, when taken on its own, has a higher per capita income than either of the two Scandinavian countries and a larger population.
It is interesting that the international comparison does not point to any strict trade-off between average income and income inequality (after taxes and benefits). On the contrary, data suggest that in rich countries distribute available income more equally.
That does not mean, however, that a higher degree of redistribution leads to higher incomes, nor that higher income leads to higher redistribution. Presumably the same institutional factors which positively influence the level of income also mean that redistribution is possible without hurting further income growth too much. After all, the public sector in Spain, Italy, France and also the UK (countries with lower income and higher inequality) is generally regarded as more corrupt than in Germany.
The simple international comparison should not be interpreted that in a given country with given quality of institions there isn’t a local trade-off between inequality and income. The more a state redistributes through taxes, price fixing or regulation, the weaker tends to be the incentive to be productive. One can expect that this negative association between redistributory measures and the level of average income is the strongest in those countries where the quality of state institutions is the poorest. State redistribution therefore behaves just like state regulation: the effect gets worse as the state starts to work more to the benefit of the few at the cost of the many.
Whether or not the comparatively high level of German equality is considered high enough, everyone should be able to agree that further growth of the quality of state institutions is desirable. This should involve an introduction of instruments of redistribution which do not admit any discretion on the part of an individual. That way one should minimise the danger that the state will become an instrument for private interests.
Unfortunately, the recently invoked control-intensive measures such as minimum wage or the brake on accommodation prices do not belong to such category of good instruments.
(This article has been translated from the original German by Petr Barton.)