# **4. TAX AND TRANSFER POLICIES PLAY A VERY IMPORTANT REDISTRIBUTIVE ROLE**

17. While income inequality in EU countries is in general quite low compared to other countries in the world, this is in large part due to the strong redistributive roles of their national tax and benefit systems. General government spending in EU countries averages close to half their total GDP, a considerably higher share than in the United States and other OECD countries. In addition to differences in levels of total government spending, EU countries devote a considerably larger share of public expenditures to direct transfers to households and subsidies—for instance spending on social programs like old-age disability and survivors’ benefits, unemployment and other labor market programs as a share of GDP is considerably higher than in the United States. The importance of social programs in redistributing incomes in Europe is well-known, and has been the subject of considerable scholarly attention. While less is known about the structure of personal taxes in these countries, broad comparisons undertaken earlier suggest that the income tax system in European countries is also considerably more progressive than in the United States.<sup>12</sup> 18. Using data from the EU-SILC, this section analyzes the progressivity of the tax and benefit systems in different EU countries, with a particular emphasis on EU8 countries. A key advantage of using unit-record survey data to examine the incidence of the respective tax and benefits systems across different countries is that the analysis can move beyond comparing simple averages to analyzing variations in tax incidence across different income groups. We start first by presenting some summary statistics on the relative size of the tax and benefit system in the various EU member countries. Average total taxes and benefits in EU countries, expressed as shares of total equivalized disposable incomes, are presented in Table 3.

**Table 3: Average taxes and benefits as a share of disposable incomes**

|**Country**|**Average**<br>**disposable**<br>**income**|**Average**<br>**taxes**|**Average**<br>**benefits**|**Average**<br>**tax share**|**Average**<br>**benefit share**|
|---|---|---|---|---|---|
|Denmark|26,801|14,538|4,491|52|21|
|Netherlands|21,327|10,892|3,091|46|17|
|Sweden|20,407|9,383|4,288|42|25|
|Poland|4,019|1,405|886|33|27|
|Belgium|20,136|7,510|4,404|32|30|
|Finland|22,072|7,827|4,479|32|26|
|Austria|20,933|6,955|4,365|31|24|
|United Kingdom|25,144|8,948|3,718|31|21|
|Slovenia|10,493|3,390|2,797|27|31|
|Luxembourg|36,094|9,715|6,429|24|20|
|Czech Republic|5,837|1,393|1,140|21|25|
|Hungary|4,960|1,236|1,294|21|33|
|Estonia|4,675|969|786|18|24|
|Lithuania|3,213|706|640|18|28|
|Slovakia|4,085|775|862|17|23|
|Ireland|24,404|4,815|5,205|15|32|
|Spain|13,192|2,119|2,756|14|28|

_Source:_ World Bank staff calculations based on 2006 EU-SILC data. Countries are sorted in descending order of the average tax share (tax share computed for each household as total taxes paid / total disposable income) 19. Among EU members, the tax share varies from a low of 14 percent in Spain to over 50 percent in Denmark. Among the EU8 group, tax shares are in general considerably lower than in other EU15 12 For instance, see Alesina, Glaeser, and Sacerdote “Why Doesn’t the United States have a European-style Welfare State?”, Bookings Papers on Economic Activity, Vol. 2001, No. 2, pp. 187-254.