How Low-Poverty Countries Do It

Earlier this week, the Organization for Economic Cooperation and Development (OECD) released its newest slate of poverty and inequality data for its member countries. The OECD data is the best out there for seeing how social indicators in the United States stack up against a few dozen other countries, most of which are similarly rich and industrialized. It also gives good insight into how low-poverty countries actually get that way. This release confirms what many other releases before have shown: low-poverty countries primarily tackle poverty through tax and transfer programs.

Because poverty measurements vary across countries, the OECD uses a relative poverty measurement. In the OECD figures that follow, someone is counted in poverty if their income is less than 50% of the median income in their country. So if the median income is $40,000, the poverty line is $20,000. This does not match the poverty measurement the United States government uses, and some view it more as a measurement of low-end inequality than poverty. Regardless of which way you prefer to think about it, poverty and low-end inequality are both significant problems.

Pre-T&T Poverty
For 2010, the OECD has pre-tax, pre-transfer (pre-T&T) poverty data for 26 countries. These figures are arrived at by looking at the incomes people bring down before taxes and before they have received government transfer payments, i.e. their “market incomes.” Of the 26 countries, the United States ties for the 13th highest pre-T&T poverty rate, which stands at 28.4%. The countries with the lowest pre-T&T poverty rates are Korea, Iceland, Denmark, the Netherlands, and Norway, with pre-T&T poverty rates spanning from 17.3% to 25.7%. At 35%, Spain has the highest pre-T&T poverty rate.

Post-T&T Poverty
Of course, excluding taxes and transfers from your poverty measurement does not ultimately tell you how people actually live. You need to look at the post-tax, post-transfer (post-T&T) poverty rate for that. When we look at this rate, we find that, at 17.4%, the United States has the 2nd highest post-T&T poverty rate among the 26 countries, trailing only Israel. The countries with the lowest post-T&T poverty rates are the Czech Republic, Denmark, Iceland, Luxembourg, and Finland, with post-T&T poverty rates ranging from 5.8% to 7.3%.

There are two conceivable paths to having a low post-T&T poverty rate, this again being the rate of most significance to people’s lived lives. A country can put a lot of effort into bringing up the market incomes of low-income people. Or it can compensate for those low market incomes on the back end through taxes and transfers. While there is some of both going on, the overall trend is to do the latter. The 13 countries with the lowest post-T&T poverty rates reduced their poverty by 20.7 percentage points through taxes and transfers. Meanwhile, the 13 countries with the highest post-T&T poverty rates only reduced their poverty by 15.7 percentage points through taxes and transfers. An animation showing the amount of poverty each country reduces via tax and transfer programs can be found here.

If the US wants to follow the general example of low-poverty countries in the OECD, it will need to up its transfer payments. That will mean expanding the Earned Income Tax Credit, the Child Tax Credit, or creating new transfer programs like the universal basic income I discussed earlier in the week.