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"Budget 2003: Analysis of the Distributional Impact"

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The Domestic Economy BUDGET 2003: ANALYSIS OF THE DISTRIBUTIONAL IMPACT TIM CALLAN, MARY KEENEY AND JOHN WALSH The overall size of the income tax/welfare package contained in Budget 2003 is very limited compared with corresponding packages in recent years. The background to this, in terms of developments in the domestic and world economies, is well known. In this article, we examine the first round distributional impact of the income tax and social welfare policy changes announced in Budget 2003. 1. Introduction What will be the impact of Budget 2003’s tax and welfare measures on the distribution of income? Most commentary on this topic focuses on calculations of cash gain or loss for selected illustrative households. But a small number of hypothetical households cannot adequately represent the diversity of the population. Families differ widely in terms of their demographic composition, incomes, housing situations, the labour market position of their members and other characteristics relevant to their income tax liabilities and welfare entitlements. The only systematic way of taking account of this diversity is to use a tax-benefit model, which simulates the tax liabilities and welfare entitlements for a large-scale nationally representative sample of households. This is precisely what is done by SWITCH, the ESRI tax-benefit model (see box for a brief description). 2. Assessing Distributional Impact Most readers will be familiar with the broad outlines of the framework used in constructing the opening budget: expenditures are set, for the most part, at levels corresponding to a “constant level of service”, and tax rates and other parameters, along with welfare rates, are typically frozen in nominal terms. On Budget day, the Minister for Finance announces changes relative to this opening budget. Budget day documentation and most subsequent analysis assumes, in line with this conventional opening budget, that tax and welfare rates woul

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