The effect of taxes and benefits in reducing the inequality arising from the distribution of original income

Across European countries, the contribution of the tax-benefit systems to reducing inequality levels varies as much as the distribution of original income. Figure 8 shows the Gini coefficient for the household original income, original income with public pensions and disposable income, with each income measure equivalised using the modified OECD scale.[1]

The difference between original income inequality and disposable income inequality represents the total redistributive effect of benefits and taxes. Alternatively, if public pensions are excluded from the measure of redistributive policy instruments, and included as part of original income, the total redistributive effect is limited to the difference between inequality in original incomes plus public pensions and inequality in disposable incomes.

Figure 8: Income inequality (Gini coefficient) before and after taxes and benefits (2009 policies)

Inequality of disposable income across these 18 EU countries, measured by the Gini coefficient, ranges from 0.22 in Belgium and Slovakia to 0.35 in Greece and Portugal. The variation in the Gini coefficient of original income is generally smaller. Cyprus has the most equal distribution of original income, with a Gini coefficient of 0.38. In the remaining countries, the Gini coefficient for original income varies from around 0.43 to 0.46 in Slovakia, Slovenia, Sweden and Spain to around 0.52 to 0.54 in Poland, the UK, Portugal and Greece.

Public pensions play an important role in reducing inequality in most countries. Indeed, their impact is larger than that of the remaining tax-benefit instruments combined in 13 out of the 18 countries. Public pensions make relatively little difference to inequality in the UK and Ireland. The tax-benefit system does most in absolute terms to reduce inequality in the UK, the Netherlands, Ireland and Belgium, and least in Cyprus, Spain and the three Baltic countries.

[1] Note that public pensions are here shown gross of taxes; the taxes on them are included in the difference between disposable income and original income plus public pensions.