Income redistribution through taxes and social benefits: The case of Slovenia and Croatia

Mitja Cok,Ivica Urban,Miroslav Verbic

doi:10.2298/pan1305667c

Mitja Cok, Ivica Urban + Show 1 more

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https://doi.org/10.2298/pan1305667c

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Abstract

The article analyses the redistributive effect attained by personal income tax, social security contributions and social benefits in Slovenia and Croatia. The redistributive effect is decomposed first to reveal progressivity and horizontal inequity effects, and further to show contributions of different tax and benefit instruments. Even though both countries started from the same socioeconomic background two decades ago, the current results reveal divergence that is a consequence of diverse development during this period. The results indicate that Croatia experienced significantly higher pre-fiscal income inequality and lower redistributive effect than Slovenia. Horizontal inequity effects, though, were higher in Slovenia than in Croatia. In both countries, the meanstested social benefits exerted an over-proportionate influence on the vertical effect, suggesting a strong impact of the welfare state on income position of their residents, but also induced a large amount of horizontal inequity. In Slovenia, the non-means-tested benefits slightly increased income inequality.

Highlights

Social security programs provide income assistance in the form of social benefits to individuals and their families in the case of unemployment, work injury, maternity, sickness, old age, or permanent earning inability
We focus our research on tax and benefit systems consisting of social benefits, social security contributions and personal income tax (PIT)
One of the main conclusions from the above comparison of two countries is that the Slovenian tax and benefit system created much larger horizontal inequity than the Croatian tax and benefit system, while the redistributive effect was only slightly higher in Slovenia. How could this be explained, i.e. what tax and benefit instruments were responsible for these results? The answers are provided by applying the Urban’s (2012) decomposition of vertical, reranking and redistributive effects, with the results presented in Table 3 and Figure 4

Summary

Introduction

Social security programs provide income assistance in the form of social benefits to individuals and their families in the case of unemployment, work injury, maternity, sickness, old age, or permanent earning inability. They are financed by social security contributions, as well as by other taxes. We focus our research on tax and benefit systems consisting of social benefits, social security contributions and personal income tax (PIT). Given their size in modern states, tax and benefit systems have a significant influence on income distribution. Income inequality reduction caused by tax and benefit systems is called the redistributive effect, and it is equal to the difference between pre-tax-and-benefit (or pre-fiscal) income inequality and post-tax-and-benefit (or post-fiscal) income inequality

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