Poverty Reduction Effects of Taxation and Benefit Policies in Finland, 1993–2013
| Author | Pasi Moisio,Susanna Mukkila,Kirsi-Marja Lehtelä |
| DOI | 10.1177/138826271601800102 |
| Published date | 01 March 2016 |
| Date | 01 March 2016 |
| Subject Matter | Article |
30 Intersentia
POVERTY REDUCTION EFFECTS
OFTAXATION AND BENEFIT POLICIES
INFINLAND, 19932013
P M*, K-M L** and S M***
Abstract
In this article we estimate counterfactual poverty rates in order to evaluate the impact
of changes in taxation and bene ts on the increase of the poverty risk rate in Finland
between 1993 and 2010. Household disposable incomes are simulated by using the
households from the 2010 data, but varying the annual ta xation and bene ts for the
years 1993–2013. Bene t cuts a er the 1990s depression had a rather modest impact
on poverty risk rates but changes in ta xation had a considerably larger impact. e
poverty risk rate would be 2.5 percentage points lower if tax legislation was the same
in 2010 as it was in 1993. Furthermore, the level of bene ts has decreased compared to
the average income level. If the level of bene ts in 2010 had remained at the same level
as in 1993 compared to average earnings, the poverty risk rate would be four pe rcentage
points lower in 2010. Our results show that the so-called polic y dri with r egard to soc ial
transfers can have a major impact on relative adequacy and on the poverty reduction
e e ct of social transfers in the long-run.
Keywords: counterfactual situations; microsimulation; poverty; social policy; tax-
bene t policy
* Pasi Moisio (correspondin g author) is a Research Profes sor at the National I nstitute for Hea lth
and Welfare (THL) in Fin land. Address: PO Box 30 , FI-00271 Helsinki , Finland; phone: +358 2952
47228; email: pasi.moisio@th l. .
** Kirsi-Mar ja Lehtelä is a Senior Planni ng O cer at THL. Addres s: PO Box 30, FI-00271 Helsink i,
Finland; phone: +358 2952 46879; em ail: kirsi-mar ja.lehtela@thl. .
*** Susanna Muk kila is a researcher at T HL. Address: PO Box 30, FI- 00271 Helsinki, Finl and; phone:
+358 2952 47326; email: susa nna.mukki la@thl. .
e authors are g rateful to Pertti Honk anen, Tim Goedemé and Ala ri Paulus for their comments
on and discuss ions of earlier versions of the paper. eir rese arch was supported by an Academy
of Finland research grant as part of the Social Consequences of Economic Depressions research
project (no. 259216).
Poverty Reduct ion E ects ofTaxation and Bene t Policies inFinland, 1993 –2013
European Jour nal of Social Sec urity, Volume 18 (2016), No. 1 31
1. INTRODUCTION
When evaluating p olicy reforms that aim at poverty reduction, i nformation about the
level and distribution of poverty, as well as information about the impact of policy
reforms is needed. Poverty is a complex societa l phenomenon, and there are always
multiple interconnected factors that determine its de velopment. To be able to evaluate
the impact of a policy reform, it is necessary to isolate a nd measure the impact of
all the other fac tors, such as the growt h of unemployment. Of all the factors having
an impact on the poverty rate, bene ts and taxation are among the few that policy
makers can direc tly in uence.
e simplest and probably the most common method for estimating the
poverty reduction e ect of taxation and bene t policies is to use two de nitions
of household income, namely market income and disposable income. For example,
Eurostat (2012) publishes st atistics on the at risk-of-poverty population before and
a er social transfers. e di erence between t he two poverty risk rates calculated
using these two income de nitions is a measure of the redistributive impact of
social transfers. Hence, the poverty risk rate before social transfers is assumed
to measure a counterfactual situation where socia l transfers are absent. A more
general method for estimating the impact of socia l transfers on income inequa lity
is the decomposition of income inequality measures (Riihelä et al. 2002). e
decomposition method is based on the idea t hat there are three factors shaping the
income dist ribution: fac tors a ecting the population, factors a ecting incomes,
and factors a ecting both the population and incomes. ere are limitat ions to the
decomposition method when evaluating the re-distributive impact of a pursued
social policy, and the short falls of the method are recognis ed (Atkinson et al.19 95;
Jäntti and Danziger 1998).
Tax- be ne t microsimulation models provide a more detailed and substantial
instrument for the decomposition met hod and for evaluating t he impact of policy
reforms, for instance in order to assess the poverty reduction impact of di erent
policy alternatives (Callan et al.2011; Cantillon et al.2014; De Agostini et al. 2014;
Matsaganis et al.2007) and the impact of changes i n tax on gender (Riihelä a nd
Viitamäki 2013). With microsimulation models we can expand the counterfactual
poverty r ate approach to both ex-ante and ex-post evaluations of red istribut ive
policies. In addition, microsimulation models can be used to bridge the two to three
years of delay concerning povert y statistics by using t he so-called ‘nowcasting’ met hod
(Bourguignon and Spadaro 2 006; Leventi et al.2013; Navicke et al.2013).
In this article, we rst introduce the unemployment rate and relational at-risk-of-
poverty rate in statistical terms. Secondly, we take a look at the e ective tax rates of
earnings and bene ts and at the development of wages and bene ts adjusted for the
consumer price index. We then estimate the counterfactual povert y rates in Finland
for the year 2010 by using the static SISU microsimul ation model of Statistics Finland
(2013). e me thod for simulating the counterfactua l income distributions is similar
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