The Distributional Effects of Taxes and Transfers Under Alternative Income Concepts: The Importance of Three “I”s

This article investigates how the distribution of income changes when the standard disposable income (DI) is replaced by an extended income (EI) concept that includes the three “I”s: indirect taxes, imputed rent, and in-kind benefits. Second, it assesses the distributional effects of the main types of tax-benefit instruments under different income concepts. The analysis covers three European countries (Belgium, Greece, and the United Kingdom) characterized by substantially different tax-benefit systems. The overall redistributive effect of the tax-benefit systems depends heavily on the income concept considered and the differences across countries are smaller when considering the EI. Moreover, the common use of a narrower income concept, such as the DI, can lead to the overestimation of the redistributive effect of the cash tax-benefit instruments (in relative terms), the extent of this varying across countries, due to the size and distribution of three “I”s and the adoption of the needs-adjusted equivalence scale.