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The Redistributive Effects of Tax Benefit Systems in the Enlarged EU

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Author Info

  • Clemens Fuest

    (University of Oxford, Oxford, UK, University of Cologne, Cologne, Germany, and Institute for the Study of Labor (IZA), Bonn, Germany)

  • Judith Niehues

    (University of Cologne, Cologne, Germany, and Institute for the Study of Labor (IZA), Bonn, Germany)

  • Andreas Peichl

    (University of Cologne, Cologne, Germany, and Institute for the Study of Labor (IZA), Bonn, Germany, peichl@iza.org)

Abstract

How do different components of the tax and transfer systems affect disposable income inequality? This article explores the redistributive effects of different tax benefit instruments in the enlarged European Union (EU) based on two approaches. Inequality analysis based on the sequential accounting approach suggests that benefits are the most important factor reducing inequality in the majority of countries. The factor source decomposition approach, however, suggests that benefits play a negligible role and sometimes even contribute slightly positively to inequality. On the contrary, here taxes and social contributions are by far the most important contributors to income inequality reduction. The authors explain these partly contradictory results with the different normative focus of the two approaches and show that benefits have other aims than redistribution.

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Bibliographic Info

Article provided by in its journal Public Finance Review.

Volume (Year): 38 (2010)
Issue (Month): 4 (July)
Pages: 473-500

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Handle: RePEc:sae:pubfin:v:38:y:2010:i:4:p:473-500

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Keywords: inequality; redistribution; decomposition; tax benefit systems;

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References

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  1. Anna Fräßdorf & Markus M. Grabka & Johannes Schwarze, 2008. "The Impact of Household Capital Income on Income Inequality: A Factor Decomposition Analysis for Great Britain, Germany and the USA," SOEPpapers on Multidisciplinary Panel Data Research 104, DIW Berlin, The German Socio-Economic Panel (SOEP).
  2. repec:ese:emodwp:em9-05 is not listed on IDEAS
  3. Cowell, Frank A. & Kuga, Kiyoshi, 1981. "Additivity and the entropy concept: An axiomatic approach to inequality measurement," Journal of Economic Theory, Elsevier, vol. 25(1), pages 131-143, August.
  4. Immervoll, Herwig & Levy, Horacio & Lietz, Christine & Mantovani, Daniela & O'Donoghue, Cathal & Sutherland, Holly & Verbist, Gerlinde, 2006. "Household Incomes and Redistribution in the European Union: Quantifying the Equalising Properties of Taxes and Benefits," Economics Series 184, Institute for Advanced Studies.
  5. Michael Förster & Peter Whiteford, 2009. "How much Redistribution do Welfare States Achieve? The Role of Cash Transfers and Household Taxes," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 7(3), pages 34-41, October.
  6. Sudhir Anand & Paul Segal, 2008. "What Do We Know about Global Income Inequality?," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 57-94, March.
  7. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
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Citations

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Cited by:
  1. Philipp Doerrenberg & Andreas Peichl, 2012. "The Impact of Redistributive Policies on Inequality in OECD Countries," Cologne Graduate School Working Paper Series 03-05, Cologne Graduate School in Management, Economics and Social Sciences.
  2. Cok, Mitja & Urban, Ivica & Verbič, Miroslav, 2012. "Income redistribution through taxes and social benefits: the case of Slovenia and Croatia," MPRA Paper 38918, University Library of Munich, Germany.
  3. Wang, Chen & Caminada, Koen, 2011. "Disentangling income inequality and the redistributive effect of social transfers and taxes in 36 LIS countries," MPRA Paper 32821, University Library of Munich, Germany.
  4. Erwin Ooghe & Andreas Peichl, 2011. "Fair and Efficient Taxation under Partial Control: Theory and Evidence," CESifo Working Paper Series 3518, CESifo Group Munich.
  5. Medeiros, Marcelo & Souza, Pedro H.G.F., 2013. "The State and income inequality in Brazil," Institute for Research on Labor and Employment, Working Paper Series qt584222f0, Institute of Industrial Relations, UC Berkeley.
  6. Thor O. Thoresen & Zhiyang Jia & Peter J. Lambert, 2013. "Distributional benchmarking in tax policy evaluations," Discussion Papers 765, Research Department of Statistics Norway.
  7. Caminada, Koen & Goudswaard, Kees & Wang, Chen, 2012. "Disentangling income inequality and the redistributive effect of taxes and transfers in 20 LIS countries over time," MPRA Paper 42350, University Library of Munich, Germany.
  8. Isabelle Joumard & Mauro Pisu & Debbie Bloch, 2012. "Tackling income inequality: The role of taxes and transfers," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 37-70.
  9. Ivica Urban, 2014. "Contributions of taxes and benefits to vertical and horizontal effects," Social Choice and Welfare, Springer, vol. 42(3), pages 619-645, March.
  10. Olivier Bargain, 2012. "Decomposition analysis of distributive policies using behavioural simulations," International Tax and Public Finance, Springer, vol. 19(5), pages 708-731, October.
  11. Judith Niehues, 2010. "Social Spending Generosity and Income Inequality: A Dynamic Panel Approach," SOEPpapers on Multidisciplinary Panel Data Research 336, DIW Berlin, The German Socio-Economic Panel (SOEP).
  12. Christoph Schinke, 2014. "Government Ideology, Globalization, and Top Income Shares in OECD Countries," Ifo Working Paper Series Ifo Working Paper No. 181, Ifo Institute for Economic Research at the University of Munich.
  13. Niehues, Judith, 2010. "Social Spending Generosity and Income Inequality: A Dynamic Panel Approach," IZA Discussion Papers 5178, Institute for the Study of Labor (IZA).

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