Abstract
We assess how tax‐benefit policy developments in 2001–11 affected the household income distribution in seven EU countries. We use the standard microsimulation‐based decomposition method, separating further the effect of structural policy changes and the uprating of monetary parameters, which allows us to measure the extent of fiscal drag and benefit erosion in practice. The results show that despite different fiscal effects, policies overall mostly reduced poverty and inequality and both types of policy developments had sizeable effects on the income distribution. We also find that the uprating of monetary parameters not only had a positive effect on household incomes, meaning fiscal drag and benefit erosion were avoided, but generally also contributed more to poverty and inequality reduction than structural policy reforms.
Highlights
The subject of income distribution has seen an upsurge of interest in the economic literature since the 1990s (Atkinson, 1997), and especially so in the aftermath of the Great Recession with the negative consequences of rising inequality moving into the spotlight (e.g. Stiglitz, 2012; Corak, 2013; Piketty, 2014; Atkinson, 2015)
We focus on the role of policies, corresponding to a partial decomposition in the Bargain and Callan (2010) framework, but introduce further subcomponents to distinguish between the structural effect and indexation effect
Our results concentrate on the role of tax-benefit policies and abstract from all the other drivers of changes in the income distribution over the period
Summary
The subject of income distribution has seen an upsurge of interest in the economic literature since the 1990s (Atkinson, 1997), and especially so in the aftermath of the Great Recession with the negative consequences of rising inequality moving into the spotlight (e.g. Stiglitz, 2012; Corak, 2013; Piketty, 2014; Atkinson, 2015). In the European context, public pensions are usually indexed but most countries do not have automatic indexing regimes to adjust the levels of other benefits or tax thresholds over time This increases the likelihood of taxbenefit systems lagging behind general developments in the economy and may contribute to larger fiscal drag and benefit erosion. We consider the decade since 2001, when a strong emphasis was placed on reducing poverty and social exclusion at the EU level (European Council, 2000) but which has not received much attention in the literature with international developments in the pre-crisis period understudied This is a period which contains episodes of both economic growth and recession and allows us to study indexation effects in the context of a full business cycle. The way monetary parameters were uprated (indexed) had a positive effect on household incomes—meaning fiscal drag and benefit erosion were generally avoided—and contributed more to poverty and inequality alleviation than changes to the structure of policies.
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