On Inter‐ and Intra‐Individual Redistribution of the Welfare State

Objective. The redistributive effect of the welfare state is traditionally measured by comparing the gross and net distribution of annual income among adults. This standard approach does not account for the fact that a large share of the taxes paid by adults are paid back to the very same individuals later in life. The objective of this article is to examine the factors that determine the difference between redistribution according to the standard approach and redistribution of lifetime incomes. I also discuss under what circumstances intra‐individual redistribution is beneficial for low‐income earners. Methods. A formal model of a simple welfare state in a society with low‐ and high‐income earners is used to describe inequality of gross and net income among adults and for complete lifetime incomes. The model is calibrated with data describing the Swedish welfare state. Results. Theoretically, the redistribution of lifetime income can be bigger or smaller than the redistribution indicated by the standard approach. Swedish data suggest that most welfare states are more redistributive when a lifetime perspective is used compared to the standard approach. Conclusions. Most of the redistribution carried out by modern welfare states is so‐called intra‐individual redistribution. Compared to the situation that would arise without the welfare state, intra‐individual redistribution is likely to be favorable for low‐income earners because it compensates for inequalities in the distribution of assets and access to capital markets.