Income Distribution in the European Union

Silvia Avram, Horacio Levy, Alari Paulus, Holly Sutherland

Bucharest, 10th November 2012

Question Motivation Data & methods Results Summary & conclusions

Outline

Redistributive effect of the tax benefit systems in the EU Overall Various policy instruments

Are some instruments more effective at redistributing?

Relationship between TB/ instrument size & redistributive effect

Question

Previous work on income distribution: Macro level indicators (Brady, 1995;

Castles and Mitchell, 1992; Esping-Andersen, 1990; Korpi 1989; Korpi 1998)

Model families (Wagstaff and van Doorslaer, 2001)

Luxembourg Income Study ( Atkinson et al., 1995; OECD, 2011)

EU-SILC (Fuest et al, 2010)

Motivation (I)

Our approach micro-simulation Micro level analysis Focus on the distribution of incomes in the entire

population capturing “full” distributions not just description of “types”

Own classification of tax-benefit instruments Benefit transfers-more detailed level Decomposition of the elements of the income tax Measurement of benefits & taxes Recent policy years Able to compare all 27 MS

Motivation (II)

EUROMOD-tax-benefit micro-simulation model

Includes all 27 MS of the EU Comparability Input data: EU-SILC (2008) + national SILC /variables Simulated policies:

SICs Income tax Means-tested benefits Non contributory, non means-tested benefits

Uprating (time period discrepancy)

Data & methods (EUROMOD)

Data & methods (Measurement)

HDI=Market Inc. +Transfers – SIC - Tax Household level Equivalised (modified OECD scale) Income components:

Original market income Public pensions SICs Direct income tax : schedule, allowances & credits Means-tested benefits Non means-tested, contributory benefits Non means-tested, non contributory benefits (residual)

Data & methods (Incomes)

Results (I)Taxes* and benefits as share of disposable income, 2010

Results (II)Taxes* and benefits as share of disposable income, 2010: bottom quintile

Results (III)Taxes* and benefits as share of disposable income, 2010: top quintile

Results (IV)Changes to inequality indices due to exclusion of pension income, 2010

Results (V)Changes to inequality indices due to exclusion of tax schedules (gross tax before allowances), 2010

Means-tested benefits: Redistributive everywhere Stronger effect when component larger (UK, FR,

NL) No relationship with size of the TB

Contributory benefits Small redistributive effect Strongest effect- SE, BE, DK, NL (large TB)

Non-contributory, not means-tested benefits Small redistributive effect Exception: HU

Results (VII)

Tax allowances Flat taxation progressive Progressive taxation regressive

Tax credits Slightly redistributive Very small impact (S-Gini)

Worker contributions Generally redistributive but much less than

public pensions / tax schedules May also increase inequality if low caps on

contributions

Results (VIII)

Overall-T-B significant reduction of inequality Most effective redistributive instruments:

Public pensions Tax schedules

Redistributive power share in HDI Simpler, lower > more complex, higher

taxation Fiscal benefits (TA & TC) low impact on

inequality CEE no distinctive TB system

Summary & conclusions (I)

Caveats:Measurement error in the input dataError in the simulations First round impact (i.e. no behavioural

effects)Static decomposition

Redistribution across the life-cycle & across individuals

No accounting of interactions between elements of the TB system in the decomposition

Summary & conclusions (II)

Thank you!