OECD: Tax Now Less Effective At Redistributing Incomes

by Ulrika Lomas, Tax-News.com, Brussels

22 October 2008

The Organisation For Economic Co-operation And Development has released a new report, titled ‘Growing Unequal?’, in which it analyses the changes in income distribution and poverty in OECD countries, and claims that tax policy is increasingly less effective as a tool for redistributing incomes.

Launching the report in Paris, OECD Secretary-General Angel Gurría said:

“Although the role of the tax and benefit system in redistributing incomes and in curbing poverty remains important in many OECD countries, our data confirms that its effectiveness has gone down in the past ten years. Trying to patch the gaps in income distribution solely through more social spending is like treating the symptoms instead of the disease.”

The key finding of the report is that the gap between rich and poor is growing. The reasons for this are given as:

”In most countries the gap is growing because rich households have done significantly better than middle-class and poor households. Changes in the structure of the population and in the labour market over the past 20 years have contributed greatly to this rise in inequality.

• Wages have been improving for those people who were already well paid.
• Employment rates have been dropping among less-educated people.
• And, there are more single-adult and single-family households.”

The report goes on to discuss what can be done to rectify the situation and close the poverty gap, again highlighting that the solution is not necessarily to be immediately sought through manipulation of the tax and benefit systems.

“In some cases, government policies of taxation and redistribution of income have helped to counteract widening inequalities, but this cannot be their only response. Governments must also improve their policies in other areas.

• Education policies should aim to equip people with the skills they need in today’s labour market.
• Active employment policies are needed to help unemployed people find work.
• Access to paid employment is key to reducing the risk of poverty, but getting a job does not necessarily mean you are in the clear. Growing Unequal? found that over half of all households in poverty have at least some income from work.
• Welfare-in-work policies can help hard-pressed working families to have a decent standard of living by supplementing their incomes.”

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