abstract: 'In recent decades, many affluent democracies moved from traditional

  welfare states to workfare systems. Meanwhile, income inequality

  developed differently across countries, even when they made apparently

  similar shifts from welfare to workfare. It is a matter of debate why

  welfare state change had such heterogeneous consequences across

  countries. This article proposes that different incentives to take up

  low-wage work set by tax reforms in the wake of welfare-to-workfare

  transitions alter consequences on inequality in the lower half of the

  income distribution. To support this argument, we contrast the trends

  between the U.S. and Germany. The German and U.S. tax systems were used

  in very different ways to incentivize low-wage work. The U.S. provided

  strong incentives to take up low-wage, high-hour work through refundable

  tax credits. They act as in-work subsidies and represent an enormous

  public income support program. In contrast, in Germany, payroll taxes

  were reduced for marginal employment. These jobs were intended to serve

  as a stepping stone to full employment. Germany aimed to reduce barriers

  to labor market entry, but did not increase subsidies for those working

  higher hours in low-wage jobs. We hypothesize that the German path led

  to increased income inequality within the lower half of the income

  distribution, whereas the large U.S. tax-based subsidies in the U.S.

  significantly counteracted it. Decompositions of unconditional quantile

  regressions based on the SOEP and the CPS-ASEC for 1992 and 2014

  strongly support these assumptions. Households with no labor market

  integration lost ground with the workfare reforms in both countries,

  increasing inequality in the lower half. However, U.S. households that

  conformed to the new workfare system by taking low-wage jobs received

  additional after-tax income through tax cuts and credits. This

  additional income of the beneficiary households increased the percentile

  values between the 10th and 30th percentiles by about 6 per cent, thus

  reducing income inequality in the lower half. Germany, on the contrary,

  lacked such compensatory subsidies for compliant households. Thus,

  increased takeup of low-wage work was associated with an increase in

  income inequality in the lower half. We conclude that tax systems are

  important in understanding why the shift towards workfare was associated

  with heterogeneous trends in income inequality across countries.'
affiliation: 'Binder, B (Corresponding Author), Univ Konstanz, Dept Sociol, Univ Str
  10, D-78464 Constance, Germany.

  Binder, Barbara, Univ Konstanz, Dept Sociol, Univ Str 10, D-78464 Constance, Germany.

  Haupt, Andreas, Karlsruhe Inst Technol, Inst Sociol Media \& Culture Studies, Waldhornstr
  27, D-76131 Karlsruhe, Germany.'
article-number: '100712'
author: Binder, Barbara and Haupt, Andreas
author-email: 'barbara.binder@uni-konstanz.de

  andreas.haupt@kit.edu'
author_list:
- family: Binder
  given: Barbara
- family: Haupt
  given: Andreas
da: '2023-09-28'
doi: 10.1016/j.rssm.2022.100712
earlyaccessdate: JUL 2022
eissn: 1878-5654
files: []
issn: 0276-5624
journal: RESEARCH IN SOCIAL STRATIFICATION AND MOBILITY
keywords: 'Income inequality; Tax policy; Workfare; Tax credits; Poverty;

  Unconditional quantile regression'
keywords-plus: 'WELFARE-STATE; EITC; EMPLOYMENT; POVERTY; POLICY; FAMILIES; BENEFITS;

  IMPACTS; POOR'
language: English
month: AUG
number-of-cited-references: '86'
papis_id: 2d6c6c7ea0ebe17fa340c7d50de32e34
ref: Binder2022fundamentalrole
times-cited: '0'
title: The fundamental role of tax systems in the relationship between workfare and
  inequality in the lower half of the income distribution
type: Article
unique-id: WOS:000829231400002
usage-count-last-180-days: '3'
usage-count-since-2013: '11'
volume: '80'
web-of-science-categories: Sociology
year: '2022'