The Poorest Danish Children Receive 2.6x the Transfer Income as the Poorest American Children

In my last post, I used LIS data to show that America's poorest children are essentially the poorest in the developed world. If you haven't read that post, you probably should start with it. In this post, I decompose the income that households of poor children receive, breaking it up into transfer and market income, and then do a similar ranking.

I took the bottom 10 percent of children and children between the 10th and 20th percentiles (ranked by per capita disposable income as in the prior post) and then broke out their households' income into market income and transfer income. Market income is defined as labor income plus capital income plus private transfers. Transfer income is defined as transfer income minus private transfers. The LIS microdata has uniform variables for these things. Using the mean market and mean transfer income for children within these two buckets, I ranked the countries from highest to lowest.

(Note I dropped Belgium because its tax data was incomplete.)

The percentages to the right of each country reflect how much more or less income children receive in that percentile than US children in the same percentile. Among the poorest children (those in the bottom 10%), the top four transferring countries in absolute dollars are the Nordic bloc. Finland transfers nearly twice as much per capita while Denmark transfers 2.6x as much. For the 10th-20th percentile, you have the same top 6 countries as in the 0-10th percentile, but United Kingdom and Ireland has come in to break up the Nordic bloc. The United States is second-to-last and last in transfers in the 0-10th percentiles and 10th-20th percentiles respectively.

The other two countries with fairly low absolute levels of transfers are the Netherlands and Switzerland. Those are also, however, the countries where the bottom has the highest market incomes. When the bottom receives far more income from the market distribution, transfers might seem less necessary. The United States transfers like a country where the bottom has high market incomes when in fact it is a country where the bottom has low to middle market incomes.

All else equal, if the United States transferred the same amount of PPP dollars as Denmark to these populations, the poorest children in the US (both 0-10th and 10th-20th percentiles) would be the second richest children in the developed world, just 3-4% behind Norway's poorest children. With one of the lowest tax levels in the developed world, this is something the US could easily finance. Because it chooses not to, however, its poorest children sit at and around the bottom of the developed world in disposable income.