Assessing the cushioning role of tax-benefit systems on households’ income in the euro area during the COVID-19 pandemic: a microsimulation analysis

This section analyses the extent to which the tax-benefit systems of the euro area countries have protected household incomes during the COVID-19 pandemic. We make use of EUROMOD, the EU tax-benefit microsimulation model. Detailed aggregate labour market statistics combined with a novel approach to simulate transitions from work into monetary compensation schemes (short-time work schemes, as well as compensation schemes for self-employed) and into unemployment allows us to replicate the labour market conditions observed in the COVID-19 crisis in 2020. The analysis focuses on the role of existing and newly implemented tax-benefit instruments directly affecting household income. These policies include short-term work schemes paid directly to workers and subsidies paid to firms if their amount covers directly part of workers’ salaries. The analysis is limited to the effects of the tax benefit systems on household income and partially disregards behavioural responses and macro feedbacks, since we only account for the observed changes on the labour market. We find that most of the euro area countries experienced a significant drop in market incomes, with poorer households hit the hardest. However, our findings also suggest that the tax-benefit systems of those countries have been able to absorb a significant share of the COVID-19 shock, offsetting its regressive nature on market incomes. Monetary compensation schemes implemented by euro area countries, often supported by the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE), played a key role in cushioning the fall in household income during the crisis (1).