benefits systems. Analyzing variations across countries in peoples’ preferences for redistributive state spending, many studies have found that respondents in post-socialist countries profess greater support for such spending than their U.S. or Western counterparts; however, these preferences are not necessarily confined to post-socialist countries alone, as many OECD countries (e.g. Norway, Italy) also exhibit similar such public preferences for high redistributive state spending.<sup>3</sup> 4. Using data from household surveys conducted in EU8 and other countries in the region that have recently become available—the European Union Surveys of Income and Living Conditions (EU-SILC) as well as the Life in Transition Survey (LiTS)<sup>4</sup> —this paper focuses on examining three main questions:<sup>5</sup>

- How high are income inequalities in EU8 countries, and how do they compare to prevailing levels in EU15 countries as well as other countries in the rest of the world?

- What role do income taxes and other such direct taxes as well as public transfers through the benefit systems play in redistributing incomes within these countries?

- To what extent can the income inequalities we observe across households and regions be explained by differences in factors like education levels and labor force participation rates?

5. Cross-country comparisons of income inequality are in general fraught with numerous comparability issues arising from the lack of a uniform basis to define key variables as well as differing methods of data collection. However, the EU-SILC data set provides an unprecedented opportunity for comparison of income inequality across a large set of countries, as it contains information on incomes, taxes paid, benefits and transfers received etc., based upon a common definition across all covered countries (see Box 1 for definitions of key variables used in the analysis).

6. Section 2 presents a snapshot of long-term trends in income inequality; in particular, it shows that there was considerable diversity across EU8 countries in pattern of change in income inequality: the Gini coefficient of income inequality fell in Estonia, remained unchanged in Poland, rose slightly in Slovenia and Lithuania, but rose sharply in Latvia and Hungary.

7. Section 3 compares prevailing levels of income inequality in EU8 countries with other countries, and shows that even though most EU8 countries have average incomes considerably lower than in EU15 countries, they have similar levels of inequality. While income inequality in EU countries is quite low compared to other countries in the rest of the world, this is in large part due to the very strong redistributive role of government tax and transfer policies.

8. Section 4 shows that even though the relative sizes of the respective national direct taxes and transfers systems may vary across member states, they all play an extremely important role in redistributing income from the relatively better-off to the poor.

> 3 For an excellent review of this literature, see Murthi, M & E. Tiongson “Attitudes to Equality: The “Socialist Legacy” Revisited”, Policy Research Working Paper 4529, World Bank, Washington DC

> 4 The two main household survey data sets used in this paper as well as the main variables used in the analysis are described in the Appendix.

> 5 More details on these two household surveys are presented in Annex 1.

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