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Decomposition analysis of distributive policies using behavioural simulations

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  • Olivier Bargain

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Abstract

For policy makers and analysts, it is important to isolate the redistributive impact of tax-benefit reforms from changes in the environment in which policies operate. When actual reforms are motivated by work incentives, it is also crucial to evaluate behavioural responses and the distributional consequences thereof. For that purpose, I embed counterfactual simulations in a formal decomposition framework to quantify the relative roles of (i) direct tax-benefit policy changes, (ii) indirect policy effects due to labour supply responses to the reforms and (iii) all other factors affecting income distribution over time. An application to the UK shows that the redistributive reforms of the 1998–2001 period have offset much of the rise in market income inequality and contributed to a strong decline in child poverty and poverty amongst single parent households. In the latter group, a third of the headcount poverty reduction (and half of the reduction in the depth of poverty) is on account of the very large incentive effect of the policy changes. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Olivier Bargain, 2012. "Decomposition analysis of distributive policies using behavioural simulations," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(5), pages 708-731, October.
  • Handle: RePEc:kap:itaxpf:v:19:y:2012:i:5:p:708-731
    DOI: 10.1007/s10797-011-9203-y
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    Citations

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    Cited by:

    1. Callan, Tim & Doorley, Karina & Savage, Michael, 2018. "Inequality in EU crisis countries. How effective were automatic stabilisers?," EUROMOD Working Papers EM10/18, EUROMOD at the Institute for Social and Economic Research.
    2. Nicolas Herault & Francisco Azpitarte, 2014. "Recent Trends in Income Redistribution in Australia: Can Changes in the Tax-Transfer System Account for the Decline in Redistribution?," Melbourne Institute Working Paper Series wp2014n02, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    3. Akay, Alpaslan & Bargain, Olivier & Jara, Xavier, 2017. "'Fair' Welfare Comparisons with Heterogeneous Tastes: Subjective versus Revealed Preferences," IZA Discussion Papers 10908, Institute for the Study of Labor (IZA).
    4. Figari, Francesco & Paulus, Alari & Sutherland, Holly, 2014. "Microsimulation and policy analysis," ISER Working Paper Series 2014-23, Institute for Social and Economic Research.
    5. John Creedy & Jesse Eedrah, 2014. "The Role of Value Judgements in Measuring Inequality," Treasury Working Paper Series 14/13, New Zealand Treasury.
    6. Thor O. Thoresen & Zhiyang Jia & Peter J. Lambert, 2013. "Distributional benchmarking in tax policy evaluations," Discussion Papers 765, Statistics Norway, Research Department.
    7. Dolls, Mathias & Doorley, Karina & Paulus, Alari & Schneider, Hilmar & Sommer, Eric, 2018. "Demographic Change and the European Income Distribution," IZA Discussion Papers 11440, Institute for the Study of Labor (IZA).
    8. John Creedy & Jesse Eedrah, 2016. "Income redistribution and changes in inequality in New Zealand from 2007 to 2011: Alternative distributions and value judgements," New Zealand Economic Papers, Taylor & Francis Journals, vol. 50(2), pages 129-152, August.
    9. Nicolas Herault & Francisco Azpitarte, 2016. "Understanding Changes in the Distribution and Redistribution of Income: A Unifying Decomposition Framework," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(2), pages 266-282, June.
    10. Ball, Christopher & Creedy, John, 2015. "Inequality in New Zealand 1983/84 to 2013/14," Working Paper Series 4665, Victoria University of Wellington, Chair in Public Finance.
    11. Nicolas Herault & Francisco Azpitarte, 2013. "Understanding Changes in Progressivity and Redistributive Effects: The Role of Tax-Transfer Policies and Labour Supply Decisions," Melbourne Institute Working Paper Series wp2013n33, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    12. De Agostini, Paola & Paulus, Alari & Tasseva, Iva Valentinova, 2015. "The effect of tax-benefit changes on the income distribution in 2008-2014," EUROMOD Working Papers EM11/15, EUROMOD at the Institute for Social and Economic Research.
    13. John Hills & Alari Paulus & Holly Sutherland & Iva Tasseva, 2014. "A lost decade? Decomposing the effect of 2001-11 tax-benefit policy changes on the income distribution in EU countries," ImPRovE Working Papers 14/03, Herman Deleeck Centre for Social Policy, University of Antwerp.

    More about this item

    Keywords

    Tax-benefit policy; Inequality; Poverty; Shapley value decomposition; Behavioural microsimulation; Labour supply; H23; H53; I32;

    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, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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