15 A comparison of post-social security and post-tax PRE ratios, 50% interval.

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Table 5.22 and Diagram 5.15 show that the rankings on overall poverty reduction efficiency alter considerably once the tax clawback is taken into consideration. Notably Canada,the UK and Netherlands move up two ranks, while Sweden is promoted one rank. Australia retains its position at the top of the table with the gap between it and the remaining countries substantially reduced, as compared with the post social security measures. Finally, Table 5.23 presents the ratio of primary to secondary expenditure efficiency for net transfers. The ratios for social security expenditures are also shown. It is evident that in all countries, except the UK, net spillovers are the major source of inefficiency. This is further evidence that the taxation systems in many of these countries operate to restrict the level of transfers which finally accrue to the pre-transfer non-poor.

Table 5.23. Ratio of primary and secondary expenditure efficiency, 60% poverty interval.

Sweden Ratio of VEE:1-S post - SS 1.4 Sweden Ratio of VEE:1-S post - Tax 1.5 N etherlands 1.3 N etherlands 1.4 France 1.3 France 1.3 Germany 1.1 Germany 1.3 N orw ay 1.1 N orw ay 1.3 Sw itzerland 1.0 Sw itzerland 1.1 USA 0.8 Australia 1.1 A ustralia 0.8 USA 1.0 Canada 0.7 Canada 1.0 UK 0.6 UK 0.9

This chapter has analysed poverty reduction efficiency, defined as the percentage of transfers which accrue to the poor but do not spillover the poverty line. It has been shown that taxation can play an important role in reducing spillovers. Taxation is even more significant in increasing primary targeting efficiency, that is to say in reducing the size of net transfers to the non-poor.

The evidence presented here raises doubts about the commonly held view that income-tested social security systems are necessarily more efficient in targeting the poor rather than the non-poor. Indeed, primary expenditure efficiency in the universal or social insurance systems is at least as high on social security transfers and tends to be higher with respect to net transfers. This evidence lends some credence to the claim that taxation can act as a de

w idespread income testing which does stand out as the most efficiently targeted on the poor is Australia.

The area in which income-tested systems do appear to be more efficient is in relation to transfers which spillover the poverty line. Taxation plays an im portant role in reducing the size of the spillover in some of the non income-tested systems, especially in Sweden and the Netherlands, but even on net transfers spillover is less in the income-tested systems.

In aggregate, poverty reduction efficiency, which is the product of the primary and secondary efficiency measures, bears some relation to income­ testing, especially after taking account of the role of taxation. The income- tested systems tend to be more efficient but, with the exception of Australia, the efficiency differences are minor.

This chapter has presented an extension to the Beckerman model to take account of the 'clawback' of benefits through taxation. Clawback is especially significant in reducing the proportion of non-poor families who receive net transfers (except in the case of France).

Analysis of the clawback of transfers to the non-poor by family type indicates that in almost all countries it is predominantly targeted on couples with children. The aged, on the other hand, are much less affected by clawback in most countries.

Disaggregation of the clawback of spillover benefits indicates, however, that in almost all countries the clawback is both small and evenly distributed across family types. The principal exception to this is Switzerland, where clawback does not appear to affect the aged as much as other family types.

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6.1. The measurement of inequality.

The measurement of inequality, like the measurement of poverty, presents researchers with a wide range of potential analytical tools and approaches. Unlike the poverty methodology, however, it is not possible to preclude any of the inequality approaches on the basis of their suitability in the comparative context or on the type of data required to support the measures: each method is driven by the same type of data (income) and each is equally applicable in a comparative context. In this respect, the choice of an appropriate inequality measure is less apparent than the choice of the poverty measure. Moreover, various writers (eg: Champemowne,1974) have pointed out that alternative measures of inequality do not provide the same ranking of distributions and that these rankings can be quite contradictory. Essentially the choice of approach comes down to what is appropriate in terms of the focus of this study. In this section I discuss the main approaches to the measurement of inequality in order to illustrate the properties of each measure. In the following section, I discuss the choice of perspective for this study and the reasons for this choice.

The literature dealing with the description and measurement of income inequality is largely associated with the disciplines of economics and econometrics. The discussion below begins with the description of the Lorenz curve and the Gini coefficient which, together, form the main conceptual bases for the inequality methodology. Since the mid-70s this work has broken into a number of branches and I provide a brief guide to the main theories in the field.

6.1.1. The Lorenz curve and Gini coefficient.

Cowell (1977) describes a number of methods which chart inequality. The best known of these is the Lorenz curve (Diagram 6.1), which is derived by arranging the observations of the incomes of the recipient units in ascending order. The cumulative population of these units is then plotted against the cumulative incomes received by the recipient population. If income were equally distributed, that is if each of n recipient units receives 1/m of total income, we would find that the diagonal described by OA

represents the income distribution. Thus in Diagram 6.1 we see that the bottom 20% of the population receives 20% of total income, the bottom 40% of the population receives 40% of total income and so on. The diagonal OA is referred to as the "line of equality" because cumulative income increases

in direct proportion to cumulative population. The closer the Lorenz curve is to this line, the more equitable the income distribution.