This document summarizes a study that uses EUROMOD microsimulation data to compare the redistributive effects of personal income taxes across 15 European countries. The study finds that tax rate structure is the most important factor influencing redistribution in most countries, accounting for over 80% of total progressivity in some cases. Exemptions and allowances also significantly impact redistribution in some countries. Countries can be grouped into those led by tax rate structure, tax base composition, or a mixed approach. Increasing top tax rates does not necessarily strongly boost progressivity and impacts vary widely between countries.

1. What makes personal income taxes
progressive? A decomposition across
European Countries using EUROMOD
Gerlinde Verbist & Francesco Figari
Centre for Social Policy, University of Antwerp
University of Insubria & ISER – University of Essex
Discussant: Richard Tonkin, UK Office for National Statistics

2. Introduction
• EUROMOD used to compare redistributive
effect of personal income taxes (PIT) in EU-15
• Structure of paper/presentation:
1) Inequality and redistributive impact of taxes
2) Methods
3) EUROMOD
4) Results
5) Conclusions

3. Inequality and redistributive impact of
taxes
• Fuest et al. (2012) personal income taxes (PIT)
important source of inequality reduction
• Verbist & Figari (2013) strong negative relationship
between progressivity and tax levels – trade off

4. Inequality and redistributive impact of
taxes
• What factors can influence redistributive effect
of PIT?
• Structure of bands
• Tax rates
• Exemptions, allowances deductions & credits
• Changes to underlying income distribution
• Consequences of tax reforms often less clear
than may appear

5. Methods
• Redistributive impact: Reynolds-Smolensky (1977)
index:
RS = GX – CX-T
• Progressivity: Kakwani (1977) index:
• ΠT = CT – GX

6. Methods
• Progressivity can be decomposed over different
factors:
• Pre-tax income: X
• Tax-exempt income: E
• Tax allowances: A
• Tax deductions: D(X)
• Rate schedule: r(.)
• Tax credits: K
• Net income (N) defined as:
N = X – [r(X – E – A – D(X)] – K]
N = X – Tpit

7. Methods
• Net progressivity:
• Gross progressivity = direct progressivity + indirect
progressivity:

8. EUROMOD
• Europe-wide tax/benefit microsimulation model
• Based on EU-SILC for most countries
• Uses underlying data and tax/benefit rules to simulate:
• Personal Income Taxes (PIT)
• Social insurance contributions
• Other direct taxes
• Cash benefit entitlements
• Allows identification of different tax components
• Current paper focuses on PIT

9. EUROMOD

10. EUROMOD
• Assumptions and caveats:
• Assume full tax compliance and 100% benefit take-up
(how different would results be if this assumption
changed?)
• Don’t account for taxes paid on benefits (would this
have a big impact in some countries?)
• Behavioural decisions not considered
• Look at redistribution at a fixed point in time

11. Results

12. Results
• Rate structure most important factor in most countries
• In 10 countries rate structure accounts for majority of total progressivity
• 80%+ in Austria, Denmark, France, Greece & Luxembourg
• Strong effect from exemptions/allowances in France, Ireland &
UK
• Strong effect from deductions in Portugal & Spain
• Deductions also pro-poor in Finland, Germany and Sweden. Pro-rich in
UK, Ireland & Netherlands
• Strong positive effect of tax credits in Belgium, Ireland Italy and
Spain – negative in France
• No relationship between number of tax bands and
progressivity? Probably, though ΠR low (not high – p.13) for
Sweden

13. Results
• Three groups of countries:
• Rate structure countries: Austria, Denmark, Finland, France
Germany, Greece, Luxembourg & Netherlands
• Tax base composition countries: Portugal, Sweden & UK
• Mixed structure countries: Belgium, Ireland, Italy & Spain
• Groupings changed from 1998 (Verbist, 1998)

14. Results – zero rate
• Attempt to isolate effect of zero rate:
• Basic allowance (e.g. UK)
• Zero-band rate and allowance (e.g. Sweden)
• Basic tax credit (e.g. Ireland)
• No zero-taxed part (e.g. Italy)
• 2 approaches:
• Integrate zero-taxed part as zero-band rate
• Split out zero-taxed part
• Zero-rate in Ireland and UK have similar contribution to overall
progressivity
• In Sweden residual rate effect is primary driver

15. Results – increasing the top rate
• No simple relationship between top rate and PIT
progressivity
• Simulate 5pp increase in top rate
• Progressivity up in all countries
• Impact varies widely – strongest increase in
Denmark/Sweden, also Luxembourg & UK
• Impact small/negligible in Southern Europe and France
• Generally larger impact in countries where more tax payers
affected by top tariff but not clear cut
• Behavioural effects?

16. Conclusions
• Wide variation in redistributive effects of PIT
• Most tax exemptions & allowances enhance progressivity
• Evidence on tax deductions and credits more mixed
• Wide variety in importance of rate structure
• Zero-taxed part offers considerable contribution to
progressivity but not uniform
• Top tariffs not only drivers of progressivity

17. Comments
• Very interesting and informative paper
• Well- written & clearly structured
• How sensitive are the results to the assumptions made?
• (e.g. Assuming 100% take-up/compliance, ignoring effect of taxes paid on benefits)
• Would be good to see more on changes over time within countries
• Is this distinction between rate structure and tax base composition
countries slightly arbitrary?
• E.g. Personal allowance in UK vs. zero-rate band in Austria or Greece
• Can approach be extended to look at social insurance & other direct
taxes simultaneously?
• Compare impact on progressivity/redistribution of e.g. Increase in zero-rate
coverage vs. other tax reforms
• What do policy makers need to do (differently) as a result of this work?