Management Summary

Income Inequality and Fiscal Policies’

Role in Switzerland and Germany

Module:
W.ILACM42.F20 – Economics Project

Bachelor of Science in International Business Administration

The Lucerne University of Applied Sciences and Arts
 This paper provides an analysis on income inequality differences between Switzerland (CH) and
Germany (DE), while OECD-Europe countries are taken as a comparison measure. The authors illustrate
problems faced by users of secondary statistics, showing how both cross-country comparisons and time-
series analysis can depend sensitively on the choice of data. The effect of fiscal policy measures is
investigated, hence, pre- and post-redistribution situations are shown. A focus is set on the top end of
the income distribution, namely on the top 10% and the top 1% of income shares. The Gini index was
used as an indicator to analyse inequality improvements through fiscal policy measures.

In a first step, the income distribution in CH is analysed. CH has one of the highest incomes per
capita worldwide and its historical status as international tax haven also contributed to the interest of
studying the top end of the income distribution (Martinez, 2016). Hence, we shed light on the top 1%
and the top 10% of income shares in Figure 1 and compared them to the bottom 50%. Foellmi and
Martinez (2018) stated that top incomes in CH have increased since the 1990s, and with it, also income
inequality. Figure 1 confirms this statement, while the bottom 50% records a slight decrease. Martinez
(2016) plus Foellmi and Martinez (2018) stated that top income shares have become more volatile in
recent decades. This becomes visible in Figure 1, too.

Pre-tax National Income in Switzerland (1980-2016)

40%
35%
30%
Share of total

25%
20% Top 10%
15% Bottom 50%
10% Top 1%
5%
0%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016

year

Figure 1. Pre-tax National Income in Switzerland 1980-2016. Compiled by authors. Data retrieved
April 7, 2020, from World Inequality Database (WID) (n.d.).

In a second step, cross-country comparisons regarding income distribution at the top end for
both CH and DE have been made. Figure 2 and 3 reveal more closely that, for both countries, the top
1% and the top 10% have been rising since the 1990s while experiencing volatility. It becomes apparent,
that the top 10% of income shares in DE surpassed the ones in CH since the late 1980s (see Figure 3).
 Top 1% Income Shares CH vs. DE (1980-2016)
14%

12%

10%
Share of total

8%
Switzerland
6%
Germany
4%

2%

0%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Figure 2. Top 1% Income Shares CH vs. DE 1980-2016. Compiled by authors. Data retrieved April 7,
2020 from WID (n.d.).

Top 10% Income Shares CH vs. DE (1980-2016)

40%

35%

30%

25%
Share of total

20% Switzerland
15% Germany

10%

5%

0%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016

Figure 3. Top 10% Income Shares CH vs. DE 1980-2016. Compiled by authors. Data retrieved April 7,
2020 from WID (n.d.).

To further investigate the income inequality, the P90/P10 ratio as well as the S80/S20 ratio have
been analysed for CH, DE and other OECD-Europe countries (see Appendix A). It becomes visible that
for both ratios, CH and DE are placed around the average of OECD-Europe countries. Further, the
Lorenz curve has been analysed for CH and DE (see Appendix B). However, to consider the entire
spectrum, the authors carried out a Gini-coefficient analysis (see Figure 4).

Next, income distributions from OECD-Europe countries have been used to determine Gini
coefficients on market income and on disposable income. The Gini index is a popular and broadly used
inequality indicator (Yitzhaki, 1983, p. 617; Catalano et al., 2009, p. 1). Using it, the authors were able
to find the differences in the distribution of gross income, namely the degree of inequality, among CH,
DE, and OECD-Europe countries (see Figure 4).

Gini Coefficient in OECD Countries Before and After

Redistribution, 2015
0.6
0.5
Gini coefficient

0.4
0.3
0.2
0.1
0
Slovak Republic

Netherlands

Czech Republic
Luxembourg

Lithuania
Denmark

Estonia

Belgium
Poland

Hungary

Greece
Iceland

Turkey

Slovenia

Germany
Switzerland

France

Spain

Ireland
Norway

Italy
Sweden

Latvia
Austria

Finland

Portugal
Gini (market income) Gini (disposable income)

Figure 4. Gini Coefficient in OECD Countries Before and After Redistribution, 2015. Compiled by
authors. Data retrieved April 7, 2020, from OECD.Stat (n.d.).

The tax-to-GDP ratio in DE was 38.2% in 2018, nearly four points above OECD average of
34.3%, while it was 27.9% for Switzerland within the same period. This means that Switzerland was
situated at 6.4 percentage points below OECD average (OECD, 2018).

Hümbelin and Farys (2016) stated that all western nations do have, at least to some extent, a
redistribution system in place. They include “transfers paid (taxes and direct inter-household transfers)
and transfers received (pensions, social security insurances and transfers from other households)”
(Hümbelin & Farys, 2016, p. 137). These redistribution systems are aimed at decreasing inequality.
Thus, the Gini coefficients can differ greatly when comparing pre- and post-redistribution situations, as
shown in Figure 4. In general, “Countries that achieve the largest inequality reductions through taxes
and transfers tend to be those with the lowest after-tax inequality” (Roser & Ortiz-Ospina, 2020, para.
33).

In a further step, the situation of CH and DE is presented in Figure 5. This data shows that CH
and DE have an alike Gini coefficient on disposable income with CH at 0.296 and DE at 0.293. However,
there starting point differs greatly: The Gini coefficient on gross income is 0.39 in CH, while it is 0.50
in DE. A country like DE, with a high Gini index on market income, will have to apply strong fiscal
policy measures, e.g. high taxes, to decrease the inequality on disposable income. On the other hand, a
country like CH, with a more equal gross distribution, will need less fiscal policy measures to
counterbalance income inequality.
 Gini Coefficient in Switzerland and Germany Before and
After Redistribution, 2015
0.6

0.5

0.4
Gini coefficient

Gini (market income, before

0.3 taxes and transfers)
Gini (disposable income, post
0.2 taxes and transfers)

0.1

0
Switzerland Germany

Figure 5. Gini Coefficient in Switzerland and Germany Before and After Redistribution, 2015.
Compiled by authors. Data retrieved April 7, 2020, from OECD.Stat (n.d.).

However, CH and DE both have progressive tax systems in place. According to Immervoll and
Richardson (2011), “With progressive redistribution systems in place, greater inequality automatically
leads to more redistribution, even if no policy action is taken” (p. 62). This statement at least hints that
with a progressive tax system, the effect of the redistribution is automatically more efficient, even if no
further policy action is taken. However, the authors believe that this effect is nevertheless increased by
the relatively high tax rates of DE (45%), compared to the lower ones in CH (13.2%) (OECD, n.d.).

In countries with higher Gini coefficients on market income, a stronger redistribution system is
needed to achieve a lower ratio on disposable income. The gaps between Gini index before and after
redistribution, which are visualised in Figures 4 and 5, are a good indicator of how robust a redistribution
system in a country is. Yet, it is also evident that an initial lower market income inequality, as in CH,
minimises the need for a greater fiscal effort and detracts less resources from individuals and
corporations. This could further be a reason for the generally low income-tax rates in CH and thus for
the rather high rates in DE.

To conclude, this paper shows that CH and DE are both positioned around the OECD-Europe
average when analysing their income inequality (see Figure 4). Second, we found that CH’s gross
income inequality, measured by the Gini index, is lower compared to DE. However, when examining
the disposable income inequality of both countries, it becomes clear that the distribution is more similar
there. Hence, we conclude that DE is able to even out this initial difference with its highly progressive
tax system as a major fiscal policy instrument.
 Bibliography – Part 1
Part 1 of the Bibliography includes all sources which the authors have consulted and directly
used in this paper. These sources are indicated in the paper as citations or otherwise so declared.

Catalano, M., Leise, T. L., & Pfaff, T. (2009). Measuring Resource Inequality: The Gini Coefficient.
Numeracy, 2(2), 1-22.

Federal Statistical Office. (2020). Retrieved April 5, 2020, from

https://www.bfs.admin.ch/bfs/en/home/statistics/work-income/wages-income-employment-labour-
costs/wage-levels-switzerland/distribution-net-wages.html

Foellmi, R. & Martinez, I. Z. (2018). Inequality in Switzerland: A Haven of Stability? CESifo Forum,
19(2), 19-25.

Hümbelin, O., & Farys, R. (2016). The suitability of tax data to study trends in inequality – A
theoretical and empirical review with tax data from Switzerland. Research in Social Stratification and
Mobility, 44, 136-150.

Institute for the Study of Labor. (2011). Redistribution Policy and Inequality Reduction in OECD
Countries: What Has Changed in Two Decades?. Bonn, Germany: H. Immervoll & L. Richardson.

Martinez, I. Z. (2016). Income Inequality, Taxation, and Social Spending in Switzerland. Informally
published dissertation, University of St. Gallen, School of Management, Economics, Law, Social
Sciences and International Affairs.

OECD. (2019). Revenue Statistics 2019 - Germany. Retrieved April 20, 2020, from
https://www.oecd.org/tax/revenue-statistics-germany.pdf

OECD. (2019). Revenue Statistics 2019 - Switzerland. Retrieved April 20, 2020, from
https://www.oecd.org/tax/revenue-statistics-switzerland.pdf

OECD. (n.d.). Table I.1. Central government personal income tax rates and thresholds. Retrieved April
20, 2020, from https://stats.oecd.org/index.aspx?DataSetCode=TABLE_I1

OECD.Stat. (n.d.). Retrieved April 7, 2020, from https://stats.oecd.org/Index.aspx?DatasetCode=IDD

Roser, M., & Ortiz-Ospina, E. (2013). Income Inequality. Retrieved April 7, 2020, from
https://ourworldindata.org/income-inequality

Statista. (2020). Retrieved April 5, 2020, from https://www.statista.com/statistics/750827/private-

household-income-distribution-in-germany/

World Inequality Database (WID). (n.d.). Retrieved April 7, 2020, from

https://wid.world/country/switzerland/

Yitzhaki, S. (1983). On an Extension of the Gini Inequality Index. International Economic Review,
24(3), 617-628.
 Bibliography – Part 2
Part 2 of the Bibliography contains all sources the authors have consulted but not used in this
paper. All sources listed here have been consulted for further understanding of the issues only.

Becker, J., & Elsayyad, M. (2009). The Evolution and Convergence of OECD Tax Systems.
Intereconomics, 44(2), 105–113.

Burman, L. E. (2013). Taxes and Inequality. Tax Law Review, 66, 563 – 592.

Ray, D. (1998). Economic Inequality. Development Economics (pp. 169 – 196). Princeton, NJ:
Princeton University Press.

Rother N., (n.d.). Wie gut geht es uns? [How well are we doing?]. Retrieved April 7, 2020, from
https://www.avenir-suisse.ch/microsite/verteilung/

Schweizerische Eidgenossenschaft. (2019, June). Faktenblatt “Internationaler Steuervergleich“.

Retrieved March 2, 2020, from https://www.efd.admin.ch/efd/de/home/themen/steuern/steuern-
international/internationaler-steuervergleich.html

Piketty, T. & Saez, E. (2014). Inequality in the long run. The science of Inequality, 344(6186), 838-
843.

World Inequality Lab. (2018). World Inequality Report 2018. Paris: F. Alvaredo, L. Chancel, T.
Piketty, E. Saez, & G. Zucman.
 Appendices

Appendix A: P90/P10 Ratio and S80/S20 Ratio on Disposable Income for OECD-Europe
Countries as of 2015

P90/P10 Ratio: Disposable Income, 2015

Decile shares
6
5
P90/P10 ratio

4
3
2
1
0
Slovak Republic

Netherlands

Belgium

Luxembourg

Estonia

Lithuania
Denmark

Hungary

Poland

Greece
Iceland

Slovenia

France

Germany
Ireland

Spain

Turkey
Finland
Norway

Sweden

Switzerland

Portugal

Italy

Latvia
Czech Republic

Figure 6. P90/P10 Ratio: Disposable Income, 2015. Compiled by authors. Data retrieved April 7,
2020, from OECD.Stat (n.d.).

S80/S20 Ratio: Disposable Income, 2015

Quintile Shares
8
7
6
S80/S20 ratio

5
4
3
2
1
0
Czech Republic

Slovak Republic

Belgium

Netherlands

Luxembourg

Estonia
Denmark

Lithuania
Hungary

Poland

Greece
Iceland

Slovenia
Finland

Norway
Austria
Sweden

France
Germany
Ireland
Switzerland

Latvia

Spain

Turkey
Portugal

Italy

Figure 7. S80/S20 Ratio: Disposable Income, 2015. Compiled by authors. Data retrieved April 7,
2020, from OECD.Stat (n.d.).
Appendix B: Lorenz Curve for Income Distribution in Switzerland and Germany as of
2018

Income Distribution in Switzerland and Germany, 2018

100%
90%
80%
percentage distribution

70%
60%
50% Equality
40% Lorenz (CH)

30% Lorenz (DE)

20%
10%
0%
0% 20% 40% 60% 80% 100%
percentage population

Figure 8. Income Distribution in Switzerland and Germany, 2018. Compiled by authors. Data retrieved April 5, 2020, from
Federal Statistical Office (FSO) (2020) and Statista (2020).