Redistributive effects of tax-benefit policies in the EU. Simulation of reform proposals

Abstract Inequality is one of the main current economic problems, affecting not just developing countries, but also major developed economies. Although inequality is generated by differences in market income, the public sector plays a key role in reducing it through the redistributive effect of the tax-benefit system. The first objective of this article is to understand and analyse the redistributive effect of tax-benefit systems in EU countries using the EUROMOD microsimulation model. The main result attained is the enormous redistributive impact of tax-benefit systems in all EU countries, reducing inequality by more than 20 percentage points. From the analysis of the different types of policies and countries it is possible to attain diverse patterns of behaviour by groups of countries and the best cases in terms of redistributive effect. Following this analysis of all EU countries, improvement measures are proposed for the specific case of one country, Spain. Three reforms that could improve the final income distribution of Spanish households are proposed: reforms in family policy, social exclusion and social security contributions. The three proposed reforms, based on policies used in other European countries, would have a significant cost, but would also achieve a much greater redistributive effect.