The Redistributive Effects of Tax Benefit Systemsin the Enlarged EU

How do different components of the tax and transfer systems affect disposable incomeinequality? This paper explores the redistributive effects of different tax benefit instruments inthe enlarged EU based on two approaches. Inequality analysis based on the standardapproach suggests that benefits are the most important factor reducing inequality in themajority of countries. The factor source decomposition approach, however, suggests thatbenefits play a negligible role and sometimes even contribute slightly positive to inequality.On the contrary, here taxes and social contributions are by far the most importantcontributors to income inequality reduction. We explain these partly contradictory results withthe different normative focus of the two approaches and show that benefits have other aimsthan redistribution. Finally, our country clustering shows that the Eastern European countriesdo not form a distinguished group. The Central Eastern European countries group togetherwith the Continental European countries and the Baltic States show similarities with someSouthern European countries....