The Distributional Impact of Current Income Transfer Policies in the Netherlands

Abstract

AbstractThe large and generous income transfer system in the Netherlands has caused increasing tax burdens and deficits in a period of sluggish economic growth. Confronted with this situation, the present Dutch government is trying to cut back the scope of the system substantially by reducing benefit levels. The distributional impact of this policy is simulated on a micro data set. It is found that the effects of the transfer cuts on overall income distribution are not very large: from 1983 to 1986, inequality as measured by the Gini or the Theil index increases by 3 per cent. However, inequality between working and non-working people as measured by the Theil index between groups is simulated to increase by as much as 50 per cent. On the other hand, people can be hypothesized to increase their work effort when benefit levels are lowered. Using a behavioural model, it is estimated that from 1983 to 1986 the working population might increase, ceteris paribus, by 0.5 per cent yearly as a consequence of the transfer cuts. This would imply second-round distributional effects mitigating the increase in overall inequality by one-third.