Income Distribution in the European Union

1. Income Distribution in the European Union Silvia Avram, Horacio Levy, Alari Paulus, Holly Sutherland Bucharest, 10th November 2012

2. Outline • Question • Motivation • Data & methods • Results • Summary & conclusions

3. Question • Redistributive effect of the tax benefit systems in the EU • Overall • Various policy instruments • Are some instruments more effective at redistributing? • Relationship between TB/ instrument size & redistributive effect

4. Motivation (I) • Previous work on income distribution: • Macro level indicators (Brady, 1995; Castles and Mitchell, 1992; Esping-Andersen, 1990; Korpi 1989; Korpi 1998) • Model families (Wagstaff and van Doorslaer, 2001) • Luxembourg Income Study ( Atkinson et al., 1995; OECD, 2011) • EU-SILC (Fuest et al, 2010)

5. Motivation (II) • Our approach  micro-simulation • Micro level analysis • Focus on the distribution of incomes in the entire population  capturing “full” distributions not just description of “types” • Own classification of tax-benefit instruments • Benefit transfers-more detailed level • Decomposition of the elements of the income tax • Measurement of benefits & taxes • Recent policy years • Able to compare all 27 MS

6. Data & methods (EUROMOD) • EUROMOD-tax-benefit micro-simulation model • Includes all 27 MS of the EU • Comparability • Input data: EU-SILC (2008) + national SILC /variables • Simulated policies: • SICs • Income tax • Means-tested benefits • Non contributory, non means-tested benefits • Uprating (time period discrepancy)

7. Data & methods (Measurement)

8. Data & methods (Incomes) • HDI=Market Inc. +Transfers – SIC - Tax • Household level • Equivalised (modified OECD scale) • Income components: • Original market income • Public pensions • SICs • Direct income tax : schedule, allowances & credits • Means-tested benefits • Non means-tested, contributory benefits • Non means-tested, non contributory benefits (residual)

9. Results (I) Taxes* and benefits as share of disposable income, 2010

10. Results (II) Taxes* and benefits as share of disposable income, 2010: bottom quintile

11. Results (III) Taxes* and benefits as share of disposable income, 2010: top quintile

12. Results (IV) Changes to inequality indices due to exclusion of pension income, 2010

13. Results (V) Changes to inequality indices due to exclusion of tax schedules (gross tax before allowances), 2010

14. Results (VII) • Means-tested benefits: • Redistributive everywhere • Stronger effect when component larger (UK, FR, NL) • No relationship with size of the TB • Contributory benefits • Small redistributive effect • Strongest effect- SE, BE, DK, NL (large TB) • Non-contributory, not means-tested benefits • Small redistributive effect • Exception: HU

15. Results (VIII) • Tax allowances • Flat taxation progressive • Progressive taxation regressive • Tax credits • Slightly redistributive • Very small impact (S-Gini) • Worker contributions • Generally redistributive but much less than public pensions / tax schedules • May also increase inequality if low caps on contributions

16. Summary & conclusions (I) • Overall-T-B significant reduction of inequality • Most effective redistributive instruments: • Public pensions • Tax schedules • Redistributive power share in HDI • Simpler, lower > more complex, higher taxation • Fiscal benefits (TA & TC) low impact on inequality • CEE no distinctive TB system

17. Summary & conclusions (II) • Caveats: • Measurement error in the input data • Error in the simulations • First round impact (i.e. no behavioural effects) • Static decomposition • Redistribution across the life-cycle & across individuals • No accounting of interactions between elements of the TB system in the decomposition

18. Thank you!