This paper investigates the decomposition of income inequality by income source using two distinct yet complementary methods: natural and marginal decomposition. Although widely used in applied research, especially in the context of the relative Gini index, these approaches have often yielded conflicting interpretations, especially regarding the impact of specific income sources such as pensions or social benefits. Building on recent theoretical clarifications, we demonstrate that these divergences arise from differing normative foundations: natural decomposition reflects an absolute inequality perspective, while marginal decomposition aligns with a relative view. Extending the scope beyond the Gini index, we apply both decomposition techniques to half the squared coefficient of variation, addressing a long-standing empirical gap. Using harmonised microdata for 27 EU countries from the EUROMOD microsimulation model, we analyse the contributions of six income components to overall inequality. Our findings reveal substantial cross-country variation and show how methodological choices critically influence interpretations. In particular, capital income emerges as a strong inequality-increasing force, while pensions exhibit contrasting contributions depending on the method used.
