Association for Public Policy Analysis & Management

Atkinson’s recent book Inequality: What Can Be Done? (Harvard University Press, 2015) sets out a range of concrete proposals aimed at reducing income inequality, which cover a very broad span but include major changes to the income tax and social transfers system and the minimum wage. These are framed with specific reference to the UK but have much broader relevance in demonstrating how substantial the impact on inequality of such measures could be. This paper assesses the first-round effects of these tax, transfer and minimum wage reforms on income inequality and poverty via simulation with a tax-transfer simulation model. The reforms involve a significantly more progressive income tax structure, a major increase in the minimum wage to the level which is estimated to represent the ‘Living Wage’, and alternative routes to reforming social transfers – either to strengthen the social insurance element or to restructure the entire system as a Participation Income (a variant of Basic/Citizen’s Income). The results of the simulations bringing out that the first-round effects of the tax and transfer proposals would be to substantially reduce the extent of income inequality and relative income poverty; the additional impact of raising the minimum wage to the Living Wage is modest, reflecting in particular the position in the household income distribution of those affected and the offsetting effects on household income of the withdrawal of means-tested cash transfers. The paper also brings out that the impact on inequality and poverty depends on precisely how these complex phenomena are measured, with marked differences across widely-used income inequality measures as well as between headcount versus gap-based poverty measures.