Analysing the Effects of Tax-Benefit Reforms on Income Distribution: A Decomposition Approach

18 Pages Posted: 3 Nov 2007

See all articles by Olivier Bargain

Olivier Bargain

IZA Institute of Labor Economics; University College Dublin (UCD)

Tim Callan

Economic and Social Research Institute, Ireland; IZA Institute of Labor Economics

Date Written: September 2007

Abstract

To assess the impact of tax-benefit policy changes on income distribution over time, we suggest a methodology based on counterfactual simulations. We start by decomposing changes in inequality/poverty indices into three contributions: reforms of the tax-benefit structure (rules, rates, etc.), changes in nominal levels of market incomes and tax-benefit parameters (benefit amounts, tax bands, etc.), and all other changes in the underlying population (market income inequality, demographic composition, employment level, etc.). Then, the decomposition helps to extract an absolute measure of the impact of tax-benefit changes on inequality when evaluated against a distributionally-neutral benchmark, i.e., a situation where tax-benefit parameters are adjusted in line with income growth. We apply this measure to assess recent policy changes in twelve European countries. Finally, the full decomposition allows quantifying the relative role of policy changes compared to all other factors. We provide an illustration for France and Ireland and check the sensitivity of the results to the decomposition order.

Keywords: tax-benefit policy, inequality, poverty, decomposition, microsimulation

JEL Classification: H23, H53, I32

Suggested Citation

Bargain, Olivier and Callan, Tim, Analysing the Effects of Tax-Benefit Reforms on Income Distribution: A Decomposition Approach (September 2007). IZA Discussion Paper No. 3078, Available at SSRN: https://ssrn.com/abstract=1026900

Olivier Bargain (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland
+353 1 716 8357 (Phone)
+353 1 283 0068 (Fax)

HOME PAGE: http://www.ucd.ie/economics/staff/obargain/obargain.htm

Tim Callan

Economic and Social Research Institute, Ireland ( email )

4 Burlington Road
Dublin 4
Republic of Ireland

IZA Institute of Labor Economics ( email )

Bonn, D-53072
Germany

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