The Redistributive Effects of Tax Benefit Systems in the Enlarged EU

Abstract

How do different components of the tax and transfer systems affect disposable income inequality? This article explores the redistributive effects of different tax benefit instruments in the enlarged European Union (EU) based on two approaches. Inequality analysis based on the sequential accounting 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 positively to inequality. On the contrary, here taxes and social contributions are by far the most important contributors to income inequality reduction. The authors explain these partly contradictory results with the different normative focus of the two approaches and show that benefits have other aims than redistribution.