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Analysing the effects of tax-benefit reforms on income distribution: a decomposition approach

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  • Olivier Bargain
  • Tim Callan

Abstract

To assess the impact of tax-benefit policy changes on income distribution over time, we suggest a decomposition methodology based on counterfactual simulations. First, it provides an absolute measure of the impact of tax-benefit changes on inequality, which combines changes in policy structure (rules, rates, etc.) and changes in monetary parameters (benefit amounts, tax bands, etc.) against a distributionally-neutral benchmark, i.e., a situation where monetary parameters are nominally adjusted in line with income growth. We apply this measure to analyze the effect of recent policy changes in twelve European countries. Secondly, we focus on France and Ireland to assess the relative role of policy changes compared to changes in pre-tax income (distribution, composition, demographic structure, etc.). We conduct this exercise for a battery of poverty and inequality measures and check the sensitivity of the results to the decomposition order.
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Suggested Citation

  • Olivier Bargain & Tim Callan, 2010. "Analysing the effects of tax-benefit reforms on income distribution: a decomposition approach," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 8(1), pages 1-21, March.
    • Handle: RePEc:kap:jecinq:v:8:y:2010:i:1:p:1-21
    DOI: 10.1007/s10888-008-9101-4
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    More about this item

    Keywords

    Tax-benefit policy; Inequality; Poverty; Decomposition; Microsimulation; H23; H53; I32;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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