Accounting for Differences in Income Inequality across Countries: Tax-benefit Policy, Labour Market Structure, Returns and Demographics

Denisa Sologon, Philippe Van Kerm, Jinjing Li, Cathal O'Donoghue

Research output: Contribution to journalArticle

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 roughly half 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.
Original languageEnglish
JournalJournal of Economic Inequality
DOIs
Publication statusAccepted/In press - 2020

Keywords

  • income inequality, cross-national comparisons, microsimulation, tax and transfer policy

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