Using payroll taxes as a tool for redistribution

Social security contributions are generally intended to fund social security rather than to contribute directly to redistribution. Over the last fifty years, France has radically altered the structure of social security contributions, making them the most progressive component of its tax system. Using administrative data and a detailed Microsimulation model of taxation on labour income, we show that pre-tax wage inequality (or labour cost inequality), measured by the P90/P10 ratio, increased by 15.4 per cent, whilst net wage inequality actually fell by 18.9 per cent over the period 1967–2019. This reduction in wage inequality can be largely attributed to a set of measures combining reductions in employers’ social security contributions for low-wage earners and increases in the minimum wage. We examine whether this atypical French experience can serve as an example for other countries.