An Analysis of Horizontal and Vertical Equity in Sweden, the U.S. and the U.K.

A number of authors have discussed the importance of reranking, which may occur in the process of giving transfers and collecting taxes; see especially Kakwani (1984), Jenkins (1988) and Plotnick (1985). Some of these studies have related this phenomenon to the familiar concepts known as horizontal and vertical equity. However, until recently, crosscountry comparisons of these processes have been impeded by the absence of good microdatasets. This study compares income redistribution in Sweden, the United States and the United Kingdom, using the Luxembourg Income Study (LIS) dataset to measure inequality while accounting for horizontal inequities. The usual result, that Swedish taxes and transfers remove more inequality than the U.S. and U.K. tax and transfer systems, is not overturned. However, after measuring horizontal inequities, it is found that the wide attributed to Sweden by many authors, e.g. Buhman et at. (1988), is reduced considerably. Sweden's advantage over the U.S. and the U.K. (found by ignoring horizontal inequities) falls significantly when properly measured. This paper is organized as follows. The importance of reranking is discussed in Section II along with the Gini decomposition measures used by Kakwani (1984), Lambert (1985) and Jenkins (1988). The data are described in Section III and the empirical results in Section IV. The main conclusions are summarized in Section V.