Poverty Reduction Effects of Taxation and Benefit Policies in Finland, 1993–2013

Abstract

In this article we estimate counterfactual poverty rates in order to evaluate the impact of changes in taxation and benefits on the increase of the poverty risk rate in Finland between 1993 and 2010. Household disposable incomes are simulated by using the households from the 2010 data, but varying the annual taxation and benefits for the years 1993–2013. Benefit cuts after the 1990s depression had a rather modest impact on poverty risk rates but changes in taxation had a considerably larger impact. The poverty risk rate would be 2.5 percentage points lower if tax legislation was the same in 2010 as it was in 1993. Furthermore, the level of benefits has decreased compared to the average income level. If the level of benefits in 2010 had remained at the same level as in 1993 compared to average earnings, the poverty risk rate would be four percentage points lower in 2010. Our results show that the so-called policy drift with regard to social transfers can have a major impact on relative adequacy and on the poverty reduction effect of social transfers in the long-run.