Accounting for differences in income inequality across countries: tax-benefit policy, labour market structure, returns a
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Accounting for differences in income inequality across countries: tax-benefit policy, labour market structure, returns and demographics Denisa M. Sologon1
· Philippe Van Kerm1,2 · Jinjing Li3 · Cathal O’Donoghue4
Received: 29 March 2018 / Accepted: 9 July 2020 / © The Author(s) 2020
Abstract This paper presents a framework for studying international differences in the distribution of household income. Integrating micro-econometric and micro-simulation approaches in a decomposition analysis, it quantifies the role of tax-benefit systems, employment and occupational structures, labour and financial market returns, and demographic composition in accounting for differences in income inequality across countries. Building upon EUROMOD (the European tax-benefit calculator) and its harmonised datasets, the model is portable and can be implemented for cross-country comparisons between any participating country. An application to the UK and Ireland—two countries that have much in common while displaying different levels of inequality—shows that differences in tax-benefit rules between the two countries account for over one third of the observed difference in disposable household income inequality. Demographic differences play negligible roles. The Irish tax-benefit system is more redistributive than UK’s due to a higher tax progressivity and higher average transfer rates. These are largely attributable to policy parameter differences, but also to differences in pre-tax, pre-transfer income distributions. Keywords Income inequality · Cross-national comparisons · Microsimulation · Tax and transfer policy
1 Introduction Trends in income inequality since the 1980s have been the subject of considerable attention; see for example the comprehensive review of thirty countries experiences in Nolan et al.
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10888-020-09454-7) contains supplementary material, which is available to authorized users. Denisa M. Sologon
[email protected]
Extended author information available on the last page of the article.
D.M. Sologon et al.
(2014). Examinations of the driving forces behind cross-national differences in inequality are by comparison less common (F¨orster and T´oth 2015). Yet, variations in income inequality levels across countries tend to be more striking than changes observed within any rich country in recent years. For example, according to OECD (2011), the biggest increase in the Gini coefficient of income between 1985 and 2008 among 22 OECD countries—a change of 0.07 observed in Sweden and in New Zealand—is only half the difference of 0.13 observed between the Gini coefficients for Denmark and the USA in 2008. Among EU countries, the Gini coefficient of income currently ranges from 0.24 in the Slovak Republic to 0.37 in Bulgaria, Romania or Lithuania (Eurostat 2017), a gap larger than any trends recently observed in the EU. Even though (Brandolini et al. 2010, p.97) once remarked that “. . . attempts to model and understand cau
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