Inequality, Taxation and Redistribution: A German/French Perspective – EQUITAX

The project combines harmonized measurement, causal inference and quantitative policy simulation. For WP I, the team constructs long-run German series of pre-tax and post-tax national income using the DINA methodology: income-tax microfiles are used to estimate fiscal income, imputation methods combine tax data with national accounts and household surveys to recover pretax national income, microsimulation imputes taxes and transfers to derive post-tax income.
For WP II, the project exploits rich administrative and survey data to estimate behavioral responses to taxation. The French work uses longitudinal administrative data linking income and wealth tax returns for the universe of taxpayers. The German work uses administrative inheritance tax records and SOEP data: an ongoing strand studies how changes in inheritance taxation affect firm dynamics. Identification relies mostly on quasi-experimental variation from tax reforms, including difference-in-differences designs, bunching, and case studies of the French wealth tax, and German inheritance taxation.
For WP III, the project combines the empirical estimates with a quantitative macro-distributional framework. Building on observed income and wealth distributions and on the estimated behavioral responses, it develops a heterogeneous-agent model with endogenous saving, labor supply and portfolio choices, a granular representation of the tax-and-transfer system, and explicit channels linking taxation, asset prices and market power to income and wealth inequality. The model is calibrated to match key distributional and macroeconomic facts and used to run counterfactual simulations assessing how changes in taxation, market power and asset prices contribute to income and wealth inequality dynamics. These tools can be further extended to evaluate how alternative tax reforms affect inequality and public finances.

WP I — Long-run inequality and redistribution. The project provides new evidence on the long-run distribution of national income and on the respective roles of predistribution and redistribution. For Germany, the new DINA series show that pre-tax national income inequality rose from the 1990s to the late 2000s, mainly because labour incomes declined at the bottom while incomes rose in the top decile. This trend partly reversed after 2007, as labour incomes recovered across the bottom 90%. The top 1% income share remained broadly stable, but its composition is distinctive: it is dominated by business income, with a large role for non-corporate business owners in labour-intensive professions. In this respect, Germany appears closer to the United States than to France, where top incomes are more strongly linked to the corporate sector.
The comparative work on France and the United States shows that redistribution substantially reduces inequality in both countries. Yet most cross-country and long-run differences in post-tax inequality are driven by differences in pre-tax inequality rather than by redistribution alone. In France, the long-run decline in inequality is more strongly related to changes in pre-tax income than to changes in the redistributive system. This highlights the importance of “predistribution” (institutions and policies that shape market incomes before taxes and transfers) and shows why simple cross-country comparisons of redistribution can be misleading.
WP II — Behavioural responses to wealth taxation. The project also provides new evidence on the role of tax design and information requirements. Using a reform of the French wealth tax that reduced reporting obligations below a threshold, the analysis shows that affected taxpayers reported significantly lower wealth growth after the reform. The response is concentrated in self-reported wealth, with little corresponding change in third-party-reported income, suggesting that reduced disclosure increased evasion rather than real economic responses. By contrast, responses to tax-rate incentives are small. The results show that tax base elasticities depend not only on tax rates, but also on the information available to the tax administration.
WP III — Drivers of inequality dynamics. The project finally develops a quantitative macro-distributional framework to study the forces behind income and wealth inequality in France. A heterogeneous-agent model with endogenous portfolio choices, a detailed tax-and-transfer system, and a channel linking markups to top incomes reproduces the main trends in income and wealth inequality since 1984. The results show that rising markups are the main driver of rising income inequality, while taxation, markups and asset prices all contribute to wealth inequality. The analysis also stresses the role of endogenous saving and portfolio responses, showing that inequality dynamics cannot be understood from taxation alone.

The distinctive feature of EQUITAX is that it connects three levels of analysis that are often treated separately: long-run distributional measurement, causal evidence on tax responses, and quantitative macro-distributional modelling. The project has not only produced new harmonized evidence on inequality, notably through German DINA series and comparative work on France and the United States, it has also shown why pre-tax inequality and “predistribution” are central to understanding post-tax inequality. This shifts the focus from redistribution alone to the broader set of institutions and market mechanisms that shape income before taxes and transfers.
A second distinctive contribution is the attention paid to tax design and information. The work on the French wealth tax shows that reporting requirements can matter more than statutory tax-rate incentives for measured tax-base responses. This is an important lesson for tax policy: the effectiveness of progressive taxation depends not only on rates, but also on the information available to the tax administration and on the way tax bases are defined and monitored.
Finally, the project opens a broader perspective on inequality dynamics by combining taxation with market forces. The macro-distributional model shows that rising markups, asset prices, taxation, saving behavior and portfolio choices jointly shape the evolution of income and wealth inequality. This provides a richer framework for evaluating reforms than approaches focused on taxes alone.
The future prospect is to build on these results to provide a durable empirical and policy infrastructure for European tax debates. The harmonized series, causal estimates and simulation tools can be reused to evaluate future reforms of income, wealth and inheritance taxation, and to assess how changes in market power, asset prices and public policy interact in shaping inequality.

The project has already produced a substantial body of scientific output, published, forthcoming, or under revision in peer-reviewed journals, including leading international outlets. On long-run inequality and redistribution, results have appeared in the European Economic Review with the German DINA series and in the American Economic Journal: Applied Economics with the France–US comparison, complemented by two synthesis articles in the Revue Française d’Économie. On behavioural responses, the study of the French wealth tax is under revision at the Review of Economic Studies. On inequality dynamics and tax-reform tools, the macro-distributional analysis has been published in the Journal of the European Economic Association.
Taken together, these outputs amount to six major scientific papers to date, alongside four policy reports structured around the three scientific work packages: inequality and redistribution, behavioural responses, and tax-reform tools.

While wealth and income inequality have been on the rise in many countries over the past decades, European welfare states have come under pressure in a context of persistent economic difficulties and increasing globalization. By adopting a Franco-German perspective, EQUITAX aims to contribute to this issue by shedding light onto the most effective tax and transfer instruments to fight income and wealth inequality. To achieve this aim, EQUITAX will pioneer a comprehensive analysis on the link between taxation and inequality, combining macroeconomic, theoretical, and applied microeconometric approaches.

The first working package will carry out an in-depth comparative analysis of the dynamics of income and wealth inequalities in France and in Germany. We will start by constructing original long-term series of pre-tax and post-tax income inequality for Germany. Then, we will combine these series with the existing French series to investigate how the respective national tax-and transfer systems have succeeded in reducing inequality, and how common and country-specific public policies—such as political, social, and fiscal institutions—affect the historical evolution of income and wealth inequality.

The second working package will examine the extent to which rich households modify their behavior in response to tax reforms. In particular, we will exploit the combination of excellent administrative tax data from France and Germany and sharp changes, which constitute real “natural experiments,” for the taxation of wealth in France and for the taxation of bequests in Germany. This will allow us to measure reliable estimates of key inputs for the scientific community and policymakers: What is the impact of wealth taxation on the decision to save, work, emigrate, or use optimization strategies minimizing taxable capital income? To what extent do top wealth holders adjust the timing of inter vivos gifts in order to avoid bequest taxation?

The third working package will explore what the main inefficiencies of actual tax policies are and what “optimal” systems may look like by combining the inputs from the previous working packages with taxation theory, both from the micro and macro perspectives. We will first compute the marginal deadweight loss of taxation along the income distribution of each country in order to point out parts of the distribution on which actual tax systems would be inefficient. We will then use a macro-simulation model to implement a welfare analysis of the impact of different tax reforms in France as well as in Germany. This analysis will provide a guide for the discussion on tax policy reforms.

By identifying various channels and mechanisms on inequality, taxation, and redistribution, EQUITAX will help build better governance. These new insights will provide a reliable source of information for the public debate and serve policymakers to design evidence-based policies for a fair, united, and peaceful Europe.