Do taxes and transfers reduce gender income inequality? Evidence from eight European welfare states

We examine how taxes and transfers affect the incomes of men and women. Using microsimulation and intra-household income splitting rules, we measure the differences in the level and composition of individual disposable income by gender in eight European countries covering various welfare regime types. We quantify the extent to which taxes and transfers can counterbalance the gender gap in earnings, as well as which policy instruments contribute most to reducing the gender income gap. We find that with the exception of old-age public pensions, all taxes and transfers significantly reduce gender income inequality but cannot compensate for high gender earnings gaps. Our findings suggest that gender income equality is more likely to be achieved by promoting the universal/dual breadwinner model, whereby women’s labour force participation and wages are on a par with men. To achieve this, men will likely need to work less and care more.