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Effects of tax-benefit policies on the income distribution and work incentives in Estonia

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  • Alari Paulus
  • Caroline Klein

Abstract

The paper studies the impact of tax-benefit policies on the distribution of household incomes and work incentives in Estonia. It makes use of microsimulation modelling approach and applies the EU tax-benefit model EUROMOD to quantify the first-order effects of policy changes in 2016-2018 and of a range of alternative policy scenarios aimed at increasing the adequacy of social benefits. According to the simulations, 2016-2017 policies increased household incomes relative to inflation and were both poverty and inequality reducing. Alternative policy scenarios indicate that, among the considered options, increasing the generosity of the subsistence benefit and relaxing its means test by halving the withdrawal rate (currently at 100%), would have the highest first-order impact for a given fiscal cost. However, these measures would also weaken work incentives, which points to a conventional equity-efficiency trade-off. Other simulations demonstrate some scope for improving work incentives at low and middle-income levels together with modest reductions in poverty and inequality.This Working Paper relates to the 2017 OECD Economic Survey of Estonia(http://www.oecd.org/economy/estonia-economic-snapshot/)

Suggested Citation

  • Alari Paulus & Caroline Klein, 2019. "Effects of tax-benefit policies on the income distribution and work incentives in Estonia," OECD Economics Department Working Papers 1570, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:1570-en
    DOI: 10.1787/5741a5f3-en
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    References listed on IDEAS

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    6. Alari Paulus & Iva Valentinova Tasseva, 2020. "Europe Through the Crisis: Discretionary Policy Changes and Automatic Stabilizers," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(4), pages 864-888, August.
    7. Alari Paulus & Holly Sutherland & Iva Tasseva, 2020. "Indexing Out of Poverty? Fiscal Drag and Benefit Erosion in Cross‐National Perspective," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 66(2), pages 311-333, June.
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    More about this item

    Keywords

    Estonia; income distribution; tax-benefit policies; work incentives;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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