A Re-examination of Welfare States and Inequality in Rich Nations: How In-kind Transfers and Indirect Taxes Change the Story

Previous studies find large cross-national differences in inequality amongst rich Western nations, due in large part to differences in the generosity of welfare state transfers. The United States is the least generous nation and the one having the most after-tax and transfer inequality. But these analyses are limited to the effects of cash and near-cash transfers and direct taxes on incomes, while on average, half of welfare state transfers in rich nations are in-kind benefits—health insurance, education, and other services. Counting in-kind benefits at government cost and accounting for the indirect taxes used to finance transfers substantially reduces cross-national differences in inequality at the bottom of the income distribution. The findings have implications for how we think about tradeoffs across welfare state domains that all nations face and we illustrate this with reference to the current U.S. debate about health insurance. © 2006 by the Association for Public Policy Analysis and Management