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The distributional effects of taxes and transfers under alternative income concepts: the importance of three ‘I’s

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  • Figari, Francesco
  • Paulus, Alari

Abstract

This paper investigates how the distribution of income changes when the standard definition of disposable income is replaced by an extended income concept which takes into account the three ‘I’s: indirect taxes, imputed rent, and in-kind benefits. Second, it assesses how sensitive the distributional effects of each tax-benefit instrument are to the choice of income concept. The analysis covers three European countries (Belgium, Greece and the UK) characterised by substantially different tax-benefit systems, giving a stronger base for generalising the results. The main findings are that the overall redistributive effect of the tax-benefit systems depends heavily on the income concept considered and the differences across countries are smaller when considering the extended income distribution. Moreover, the common use of a narrower income concept, such as the disposable income, can lead to the overestimation of the redistributive effect of the cash tax-benefit instruments (in relative terms), the extent of this varying across countries, due to the size and distribution of three ‘I’s and the adoption of the needs-adjusted equivalence scale.

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Paper provided by EUROMOD at the Institute for Social and Economic Research in its series EUROMOD Working Papers with number EM15/13.

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Date of creation: 22 Aug 2013
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Publication status: published
Handle: RePEc:ese:emodwp:em15-13

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  1. Rolf Aaberge & Manudeep Bhuller & Audun Langørgen & Magne Mogstad, 2010. "The distributional impact of public services when needs differ," Discussion Papers, Research Department of Statistics Norway 621, Research Department of Statistics Norway.
  2. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 6(1-2), pages 55-75.
  3. Andrew Barnard, 2009. "The effects of taxes and benefits on household income, 2007/08," Economic and Labour Market Review, Palgrave Macmillan, Palgrave Macmillan, vol. 3(8), pages 56-66, August.
  4. Alan J. Auerbach, 2006. "The Choice Between Income and Consumption Taxes: A Primer," NBER Working Papers 12307, National Bureau of Economic Research, Inc.
  5. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2010. "Automatic Stabilizers and Economic Crisis: US vs. Europe," Cologne Graduate School Working Paper Series, Cologne Graduate School in Management, Economics and Social Sciences 01-02, Cologne Graduate School in Management, Economics and Social Sciences.
  6. Avram, Silvia & Figari, Francesco & Leventi, Chrysa & Levy, Horacio & Navicke, Jekaterina & Matsaganis, Manos & Militaru, Eva & Paulus, Alari & Rastrigina, Olga & Sutherland, Holly, 2013. "The distributional effects of fiscal consolidation in nine EU countries," EUROMOD Working Papers EM2/13, EUROMOD at the Institute for Social and Economic Research.
  7. Atkinson, Tony & Cantillon, Bea & Marlier, Eric & Nolan, Brian, 2002. "Social Indicators: The EU and Social Inclusion," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199253494, October.
  8. André Decoster & Jason Loughrey & Cathal O'Donoghue & Dirk Verwerft, 2010. "How regressive are indirect taxes? A microsimulation analysis for five European countries," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 29(2), pages 326-350.
  9. Aaberge, Rolf & Langørgen, Audun & Mogstad, Magne & Østensen, Marit, 2008. "The Impact of Local Public Services and Geographical Cost of Living Differences on Poverty Estimates," IZA Discussion Papers 3686, Institute for the Study of Labor (IZA).
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