Income Redistribution in Iceland: Development and European Comparisons

Abstract

This article explores income redistribution in Iceland stemming from taxes and transfers, both in terms of its development (1995–2009) and in comparison with European countries (2007). This is done by applying various decomposition analyses, mostly based on the reduction in the Gini coefficient due to taxes and transfers. Our results show that redistribution declined substantially in Iceland between 1995 and 2007; two thirds of the reduction was due to the tax system. The reduction in tax redistribution is explained by a decrease in the personal tax allowance and changed income composition. In a comparison of western European countries in 2007, redistribution stemming from taxes and transfers was lowest in Iceland. This may be explained by low progressivity in the tax system and very low transfer payments, which may to a large extent be explained by high employment rates. In an international comparison, Scandinavian and Continental European countries have the highest levels of redistribution. For the Continental countries, this is to a large extent due to low employment rates, while in the Scandinavian countries it is due to high distributional policies.