The redistributive effect of tax and benefit systems depends heavily on the way in which income is defined, says a new working paper from the Institute for Social and Economic Research.

The paper examines how the distribution of income in three European countries (the UK, Belgium and Greece) changes when the standard definition of disposable income is replaced by a wider definition. The latter takes into account three 'I's – indirect taxes, imputed rent on owner-occupied housing, and in-kind benefits.

Key points

• Cross-country comparability of income distributions can be improved by using an extended income concept – because of differences in consumption patterns, housing markets and provision of public services.
• The overall redistributive effect of tax and benefit systems depends heavily on the income concept considered; and the differences across countries are smaller when considering the extended income distribution.
• The common use of a narrower income concept, such as disposable income, can lead to the overestimation of the redistributive effect of tax and benefit systems (in relative terms), the extent of this varying across countries.

Source: Francesco Figari and Alari Paulus, The Distributional Effects of Taxes and Transfers under Alternative Income Concepts: The Importance of Three 'I's, EUROMOD Working Paper EM15/13, Institute for Social and Economic Research (University of Essex)
Links: Working paper | Abstract