C) and Europe (Panels B and D).<sup>18</sup> Panels A and B indicate that Latin America is much more unequal than Europe. In fact, the Latin American country with the lowest Gini coefficient in this sample has inequality levels above those of the most unequal European country (Portugal).<sup>19</sup> The situation, however, changes significantly when we look at Panels C and D, which show the gini coefficients of the distribution of market incomes: whereas the average gini coefficient of market income for the Latin America sample, at .52,<sup>20</sup> is only 2 percentage points above that of disposable income, the Gini coefficients of the European countries are substantially higher than those in Panel B: the average for the 15 countries in the sample is now .46. That is, it appears that most of the difference between the two regions in the levels of disposable income inequality are due to the different impact of taxes and transfers: they reduce market income inequality considerably in Europe, and very little in Latin America.

A second issue of interest in this context is whether the observed redistribution in Europe operates through the impact of taxes or transfers. This is addressed in Figure 14 which separates the respective impacts of cash transfers and direct taxes. Panel B shows the difference between gross income (market income plus transfers) and market income (i.e. panel B shows the distributional impact of transfers) in Denmark, Finland, Ireland, the UK, and Sweden and indicates that public transfers lower the Gini coefficient of market incomes by 12-14 percentage points, and by 10-11 percentage points in Belgium, Germany, and Luxemburg. At the other extreme, in Portugal transfers lower the Gini coefficient by just 6 percentage points. The average contribution of transfers for the European sample is around 10 percentage points. In contrast, public transfers contribute only slightly to lower inequality in Latin America, lowering the Gini coefficient by between 1 and 2 percentage points, although in some cases (Peru) the distribution of income is even more unequal after transfers than before transfers.

As for the distributional impact taxes, panels C and D of Figure 14 show the difference in the gini coefficient of gross income and disposable income and indicate that the contrast between the two regions is less dramatic. Like with transfers, taxes reduce the levels of income inequality much more in European countries than in Latin America. For example, direct taxation lowers the Gini coefficient of household income by 6-7 percentage points in Austria, Belgium, and Luxemburg, and by an average 5 percentage points for the fifteen countries in the European sample. In contrast, the average decline in the Latin American Gini coefficients as a result of direct taxes is about 1 percentage point, with very little variation across countries. Thus on the whole for the European countries, transfers play a more significant role than taxes: of the 15 percentage points difference

> 18 Due to differences in the surveys used, the gini coefficients in figure 6 do not correspond exactly to those in figure 1.

> 19 This result continues to hold in a broader sample of Latin American countries, because the lowest Gini in the region (Trinidad and Tobago’s) is 42.

> 20 Somewhat surprisingly the average gini in this Latin American sample and in the broader sample in figure 1 is the same.

19