Definitions:

The Redistributive Impact of Fiscal Policy indicator is defined as the Gini Index of pre-fiscal per capita (or equivalized) income less the Gini Index of post-fiscal per capita (or equivalized) income. These terms are elaborated below and can be calculated with some different variations. The positive sign means that inequality after taxes and transfers is lower than market income inequality; the larger the number, the higher the redistributive effect.

Concepts:

-Gini Index: a commonly used measure of inequality capturing the statistical dispersion in the distribution of income over a population (Gini, 1936). A Gini Index of zero expresses perfect equality: that is, every individual in the population has the same income. A Gini Index of 100 expresses maximum inequality: that is, all income accrues to a single individual, and all other individuals have zero income.^[1]

Household income: this can be calculated: (i) in per capita terms (household income divided by the number of household members); or (ii) in equivalized terms (household income divided by the square root of the number of household members).^[2] If a different definition is used, it should be noted in the reporting document. In particular, it should be specified if the indicator is consumption rather than income.

-Pre-fiscal income: the cumulative income accruing to an individual (or a household) from market and private sources only. The Redistributive Impact of Fiscal Policy indicator can be estimated with reference to two different pre-fiscal income concepts depending on assumptions regarding the treatment of public, contributory old-age pensions (please also see the figure below and Lustig (2022) chapter 1, Section 2.2, pp. 23-33):

I) Pre-fiscal income 1 - under the “pensions as deferred income” scenario: When incomes from public contributory old-age pension-system are counted as deferred market income and old-age pension-system contributions are counted as savings from current income (that is, the old-age pension system is treated as the equivalent of a mandatory savings program), pre-fiscal income is defined as an individual’s earned and unearned incomes from market and other private sources: wages, interest and dividend income; imputed income from owner-occupied housing and from consumption of own production;^[3] remittances; private transfers; old-age pension income from the public contributory pension system; and, less any contributions to the public old-age contributory pension system. In sum, in this case pre-fiscal income is defined as follows: market income plus private transfers, contributory old-age pensions, imputed rent for owner's occupied housing and consumption of own production, and employers' contributions to all social insurance benefits, less employees' and employers' contributions to social insurance for old-age pensions.^[4] In this case, the pre-fiscal income concept is called Market income plus pensions.

II) Pre-fiscal income 2 - under the “pensions as government transfer” scenario: When incomes from current pension system are counted as a government transfer and old age pension system contributions are counted as a tax on current income, pre-fiscal income is defined as: wages, interest and dividend income; imputed income from owner-occupied housing and from consumption of own production; remittances; and private transfers only. In sum, in this case pre-fiscal income is defined as follows: market income plus private transfers, imputed rent for owner's occupied housing, consumption of own production, and employers' contributions to all social insurance benefits.^[5] In this case, the pre-fiscal income concept is called Market income.

When pensions are treated as pure government transfers, the redistributive effect of pensions may be exaggerated as retirees with zero or near zero pre-fiscal incomes will receive pension income that is – at least in part – income deferred when the individual was working. It is important to note that deferral of own income from one’s working years to one’s retired self is possible regardless of whether the pension system is actuarially fair and in both defined-contribution and defined-benefit pension plans. Treating the public contributory pension system income as pure deferred income, however, does not allow us to capture any portion of the redistributive effect of pensions which may in effect exist. Therefore, we view the pensions as government transfer and pensions as deferred income scenarios as imperfect upper and lower bound estimates (respectively) of the true redistributive effect of contributory pensions. Rather than generating estimates of the redistributive effect of fiscal policy under specific assumptions about public contributory pension system income, the OECD instead reports estimates of the redistributive effect for the population under 65 years of age (while treating contributions to the public contributory pension system as a tax). This is most comparable to the “pensions as deferred income” scenario, although not exactly the same.

-Post-fiscal income: The Redistributive Impact of Fiscal Policy indicator can be estimated with reference to two different post-fiscal income concepts, Disposable Income and Consumable Income. The most comprehensive concept is that of Consumable Income, which incorporates not only the impact of direct taxes and transfers but also of indirect taxes and price subsidies.

Disposable and Consumable Income under the “pensions as deferred income” are equal in value to Disposable and Consumable Income under “pensions as government transfer” scenarios. However, they are derived from pre-fiscal income I and pre-fiscal income II differently; please see the figure below, from Lustig (2022):

Post-fiscal incomes under the “pensions as deferred income” scenario:

Post-fiscal Income A - Disposable Income: pre-fiscal income as defined under I) above less direct taxes paid and social insurance contributions made to the public fiscal authority for all contributory benefits excluding old-age pensions plus direct cash transfers, benefits from contributory systems excluding old-age pensions, and the monetary value of benefits (measured at what governments spend) received by households in the form of near-cash transfers (e.g., food stamps, school breakfasts, school uniforms).

Post-fiscal Income B - Consumable Income: disposable income as defined immediately above less indirect taxes plus indirect price subsidies.

Post-fiscal incomes under the “pensions as government transfer” scenario:

Post-fiscal Income A - Disposable Income: pre-fiscal income as defined under II) above less direct taxes paid and social insurance contributions made to the public fiscal authority plus all benefits from contributory systems (e.g., old-age pensions, unemployment benefits, etc.), direct cash transfers and the monetary value of benefits (measured at what governments spend) received by households in the form of near-cash transfers (e.g., food stamps, school breakfasts, school uniforms).

Post-fiscal Income B - Consumable Income: disposable income as defined immediately above less indirect taxes plus indirect price subsidies.

CEQ Income Concepts

Source: Lustig (2022), Figure 6-1, p. 242.

Note: The concept of "final income" has been deleted from the original version of the figure because it is not referred to in this document. Table 6-5 describes how to compute prefiscal incomes in both scenarios in detail (Lustig, 2022, pp. 45-46).

¹

The Gini Coefficient is the same indicator but measured between 0 and 1 as a proportion rather than a percentage. ↑

²

Other equivalence scales exist but this is the one used by OECD countries in generating this SDG indicator. ↑

³

Some of the income items mentioned may not be part of the income definition used by various NSOs and IGOS, with imputed rents or consumption of own production being a case in point. ↑

⁴

Contributory old-age pensions are considered deferred income (or consumption) obtained from the contributions during working years, a form of forced savings. Other contributory benefits such as unemployment benefits, disability benefits, etc., are treated as pure government transfers. Employer's contributions to all social insurance program are added because the assumptions underlying typical fiscal incidence analysis is that the workers bear the burden of the employer's contributions in full in the form of lower wages (lower market income) and, thus, they need to be added to obtain the correct pre-fiscal income and subsequently subtracted to obtain disposable income. For details see Lustig (2022), Chapter 1 and 6. ↑

⁵

Employer's contributions to all social insurance program are added because the assumptions underlying typical fiscal incidence analysis is that the workers bear the burden of the employer's contributions in full in the form of lower wages (lower market income) and, thus, they need to be added to obtain the correct pre-fiscal income and subsequently subtracted to obtain disposable income. For details see Lustig (2022), Chapter 1 and 6. ↑

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