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

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.