To assess the impact of tax-benefit policy changes on income distribution over time, we suggest a methodology based on counterfactual simulations. We start by decomposing changes in inequality/poverty indices into three contributions: reforms of the tax-benefit structure (eligibility rules, tax rate structure, etc.); changes in nominal levels of both market incomes and tax-benefit parameters (e.g. benefit amounts, tax bands); and all other changes in the underlying population (including market income inequality and demographic composition). Then, the decomposition helps to extract an absolute measure of the impact of tax-benefit changes on inequality when evaluated against a distributionally-neutral benchmark, i.e. a situation where tax-benefit parameters are adjusted in line with income growth. We apply this measure to assess recent policy changes in twelve European countries. Finally, the full decomposition allows quantifying the relative role of policy changes compared to all other factors. We provide an illustration on France and Ireland and check the sensitivity of the results to the decomposition order.
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Paper provided by EUROMOD at the Institute for Social and Economic Research in its series EUROMOD Working Papers with number
EM5/07.
Length: Date of creation: 01 Oct 2007 Date of revision: Handle: RePEc:ese:emodwp:em5/07
Note: inequality, poverty, Tax-benefit policy, decomposition, microsimulation. Contact details of provider: Postal: RAB Butler Building, University of Essex, Wivenhoe Park, Colchester, ESSEX C04 3SQ Phone: +44 (0)1206 872957 Fax: +44 (0)1206 873151 Email: Web page: http://www.iser.essex.ac.uk/research/euromod/ More information through EDIRC
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Find related papers by 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 and Poverty - - - Measurement and Analysis of Poverty
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