Automatic Stabilizers, Economic Crisis andIncome Distribution in Europe

This paper investigates to what extent the tax and transfer systems in Europe protecthouseholds at different income levels against losses in current income caused by economicdownturns like the present financial crisis. We use a multi country micro simulation model toanalyse how shocks on market income and employment are mitigated by taxes and transfers.We find that the aggregate redistributive effect of the tax and transfer systems increases inresponse to the shocks. But the extent to which households are protected differs acrossincome levels and countries. In particular, there is little stabilization of disposable income forlow income groups in Eastern and Southern European countries....