The Redistributive Effects of Tax Benefit Systems in the Enlarged EU

34 Pages Posted: 9 Nov 2009

See all articles by Clemens Fuest

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Judith Niehues

University of Cologne

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research; University of Mannheim - School of Economics (VWL); IZA Institute of Labor Economics; University of Essex - Institute for Social and Economic Research (ISER)

Abstract

How do different components of the tax and transfer systems affect disposable income inequality? This paper explores the redistributive effects of different tax benefit instruments in the enlarged EU based on two approaches. Inequality analysis based on the standard approach suggests that benefits are the most important factor reducing inequality in the majority of countries. The factor source decomposition approach, however, suggests that benefits play a negligible role and sometimes even contribute slightly positive to inequality. On the contrary, here taxes and social contributions are by far the most important contributors to income inequality reduction. We explain these partly contradictory results with the different normative focus of the two approaches and show that benefits have other aims than redistribution. Finally, our country clustering shows that the Eastern European countries do not form a distinguished group. The Central Eastern European countries group together with the Continental European countries and the Baltic States show similarities with some Southern European countries.

Keywords: inequality, redistribution, decomposition, tax benefit systems

JEL Classification: D31, D60, H20

Suggested Citation

Fuest, Clemens and Niehues, Judith and Peichl, Andreas, The Redistributive Effects of Tax Benefit Systems in the Enlarged EU. IZA Discussion Paper No. 4520. Available at SSRN: https://ssrn.com/abstract=1501936

Clemens Fuest (Contact Author)

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
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Ludwig-Maximilians-University, Munich ( email )

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Center for Economic Studies (CES) ( email )

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++89 2180-17845 (Fax)

Judith Niehues

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
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D-68034 Mannheim, 68034
Germany

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

IZA Institute of Labor Economics ( email )

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

University of Essex - Institute for Social and Economic Research (ISER)

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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