Net Fiscal Contributions in the EU—The Role of Indirect Taxation and In-Kind Benefits

Abstract

This paper extends the traditional concept of disposable income by including in-kind transfers for education and health as well as consumption taxes in the analysis. This extended view of tax–benefit systems offers a more comprehensive understanding of redistribution mechanisms within countries and facilitates cross-country comparisons. As a first step, our analysis identifies households as either net contributors or net beneficiaries based on this extended income concept. Our results show that there is considerable variability in net fiscal contributions across households, influenced by factors such as income level, household composition and age. We find that extending the income concept reduces the number of net contributor households, as the monetary effect of in-kind benefits outweighs the effect of consumption taxes paid. However, the number of net contributor households varies considerably across EU Member States. In a second step, we take a life-cycle perspective and estimate the contribution of each age cohort in each EU Member State. Our results show that individuals contribute very differently over the life cycle across Member States and that these contributions are highly correlated with individuals' retirement decisions. We show that corporatist welfare state regimes in particular tend to have low and even negative life-cycle contributions compared to universal welfare state systems and the Baltic insurance systems, with early retirement playing a crucial role in shaping these differences.