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Accounting for Differences in Income Inequality across Countries: Ireland and the United Kingdom

Denisa Sologon (), Philippe Van Kerm (), Jinjing Li () and Cathal O'Donoghue ()

No 2018-01, LISER Working Paper Series from LISER

Abstract: This paper proposes a framework for studying international differences in the distribution of household income. Integrating micro-econometric and micro-simulation approaches in a decomposition analysis it quantifies the role of tax-benefit systems, employment and occupational structures, labour prices and market returns, and demographic composition in accounting for differences in income inequality across countries. Building upon EUROMOD (the European tax-benefit calculator) and its harmonized datasets, the model is portable and can be implemented for any cross-country comparisons within the EU. An application to the UK and Ireland?two countries that have much in common while displaying different levels of inequality?shows that differences in tax-benefit rules between the two countries account for roughly half of the observed difference in disposable household income inequality. Demographic differences play negligible roles. The Irish tax-benefit system is more redistributive than UK?s due to a higher tax progressivity and higher average transfer rates. These are largely attributable to policy parameter differences, but also to differences in pre-tax, pre-transfer income distributions.

Keywords: income inequality; decompositions; cross-national comparisons; microsimulation; tax and transfer policy (search for similar items in EconPapers)
JEL-codes: D31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eur
Date: 2018-01
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