Estimating the poverty reduction effect of tax and benefit policies in Finland 1993-2013 using a microsimulation method

The poverty risk rate increased in Finland from 7 to 14 per cent between 1993 and 2010. We have estimated the counterfactual poverty rates for the year 2010 in order to evaluate the impact of changes in tax and benefit systems on the increase of the poverty risk rate. Household disposable incomes are simulated by using the same households of the year 2010 data, but varying the annual taxation and benefit legislation covering the years 1993-2013. The method used is inspired by the Shorrocks-Shapley decomposition method. The benefit cuts after the 1990s depression had a rather modest impact on poverty risk rates and the impact was nullified during 2000s by series of benefit raises. Changes in taxation had a considerably larger impact on the poverty risk rate. The poverty risk rate would be 2.5 percentage points lower if the tax legislation were the same in 2010 as it was in 1993. Furthermore, the level of benefits has decreased compared to the average income level. If the level of benefits would have remained at the same level compared to the average earnings in 2010 as in 1993, the poverty risk rate would be four percentage points lower in 2010. The policy of non-action with social transfers can have a major impact on the relative adequacy and on the poverty reduction effect of social transfers in the long-run.