Tax-benefit Microsimulation Model Research Articles

Assessing the effectiveness of social protection measures in mitigating COVID-19-related income shocks in the European union

By means of counterfactual simulation methods, this paper quantifies the role of tax–benefit policies in mitigating the shock of the COVID-19 pandemic to household income in the European Union. The tax-benefit microsimulation model for the European Union EUROMOD is used to decompose changes in the income distribution into the effects of: (i) earnings losses due to COVID-19, (ii) automatic stabilizers, (iii) monetary compensation schemes introduced during the pandemic; and (iv) COVID-19-specific reforms to taxes and benefits implemented by European Union governments. The results show a great deal of heterogeneity between countries in terms of earnings losses and the effect of tax-benefit policies during the COVID-19 pandemic. In most countries, the largest contribution to cushioning the economic shock of the pandemic comes from monetary compensation schemes. Automatic stabilizers also play a role, mainly through the effects of social insurance contributions, taxes, and unemployment insurance benefits. Tax-benefit systems cushioned incomes to a large extent even among those most severely affected by the shock to earnings, with an important role for monetary compensation schemes, but also a larger stabilizing effect of unemployment insurance. Among automatic stabilizers, social assistance benefits played an important role in cushioning the income shock for the poorest quintiles among the most severely affected, but only in selected countries.

Social Protection Benefits Compatibility and Evaluation Criteria: the Case of Lithuania

In general, the social protection (SP) system consists of two main blocks: social insurance (SI) and social assistance (SA). The main idea of SP is to leave no one behind, support in times of social risks. However, SI and SA systems are usually developed and improved separately. Organization for Economic Cooperation and Development (OECD) and European Commission (EC) often emphasise that expenditure on the SP system in Lithuania is scarce, income poverty and inequality are critical, not improving. This raises the question of whether both elements of SP in Lithuania are based on the same criteria to achieve consolidated SP and avoid its gaps. This paper aims to identify evaluation criteria, look at the Lithuanian SP system through its main benefits, and identify whether people are protected. The analysis consists of a literature review, which helps identify evaluation criteria for the SP system, and Lithuanian analysis based on evaluation criteria for 2018–2022 policy years. Three main criteria for SP benefits evaluation are identified: coverage, adequacy, and incentives to work. To make an in-depth analysis of the SP system in Lithuania, the tax-benefit microsimulation model EUROMOD is used to analyse different households’ poverty and unemployment traps and test whether the current SP system contributes to them. It was expected that this research would help to shed a light on how well Lithuanian SI and SA function simultaneously. Results show that SP system compatibility in Lithuania is above average, the weakest part is coverage.

Evaluating the influence of taxation and social security policies on psychological distress: A microsimulation study of the UK during the COVID-19 economic crisis

Economic determinants are important for population health, but actionable evidence of how policies can utilise these pathways remains scarce. This study employs a microsimulation framework to evaluate the effects of taxation and social security policies on population mental health. The UK economic crisis caused by the COVID-19 pandemic provides an informative context involving an economic shock accompanied by one of the strongest discretionary fiscal responses amongst OECD countries.The analytical setup involves a dynamic, stochastic, discrete-time microsimulation model (SimPaths) projecting changes in psychological distress given predicted economic outcomes from a static tax-benefit microsimulation model (UKMOD) based on different policy scenarios. We contrast projections of psychological distress for the working-age population from 2017 to 2025 given the observed policy environment against a counterfactual scenario where pre-crisis policies remained in place. Levels of psychological distress and potential cases of common mental disorders (CMDs) were assessed with the 12-item General Health Questionnaire (GHQ-12).The UK policy response to the economic crisis is estimated to have prevented a substantial fall (over 12 percentage points, %pt) in the employment rate in 2020 and 2021. In 2020, projected psychological distress increased substantially (CMD prevalence increase >10%pt) under both the observed and the counterfactual policy scenarios. Through economic pathways, the policy response is estimated to have prevented a further 3.4%pt [95%UI 2.8%pt, 4.0%pt] increase in the prevalence of CMDs, approximately 1.2 million cases. Beyond 2021, as employment levels rapidly recovered, psychological distress returned to the pre-pandemic trend. Sustained preventative effects on poverty are estimated, with projected levels 2.1%pt [95%UI 1.8%pt, 2.5%pt] lower in 2025 than in the absence of the observed policy response.The study shows that policies protecting employment during an economic crisis are effective in preventing short-term mental health losses and have lasting effects on poverty levels. This preventative effect has substantial public health benefits.

Ograniczenia budżetowe gospodarstw domowych w Polsce – analiza z wykorzystaniem EUROMOD-u

The following important changes affecting Polish households’ disposable income were introduced in 2022: the personal income tax (PIT) threshold was increased and its rate lowered, the tax exempt amount was raised, the possibility of deducting health insurance contributions from PIT was abolished, and the rules for granting housing allowance were modified. The aim of the research discussed in the paper was to determine the total direct impact of the above-mentioned changes on the amount of disposable income of a single parent and an individual managing a one-person household. The research was based on the EUROMOD tax-benefit microsimulation model and the hypothetical household method. A comparison of the budget constraints of July 2021 and July 2022 shows a decrease in real disposable income among low-skilled part-time workers or those working part of the year. It was found that the changes introduced in the area of housing allowance eligibility may have negatively affected the income of individuals living in one-person households receiving wages of less than 40% of the average salary. The lack of indexation of benefits is also observed to have had a negative impact on single parents’ income.

The distributional impact of fiscal measures to compensate for consumer inflation in Greece in 2022

This paper analyses the distributional implications of consumer inflation in Greece and of the fiscal measures adopted to cushion its adverse impact on households in 2022. The analysis employs the tax-benefit microsimulation model for the European Union (EUROMOD) to study how inflation, income support measures, as well as measures aimed at containing prices affected households’ purchasing power and welfare across the income distribution. The study confirms that the purchasing power of lower-income households was more severely affected by the 2022 inflation surge than that of higher-income households, resulting in the so-called inflation gap. The unequal impact of inflation was further magnified by the high shares of consumption in the income of the poorer, resulting in a welfare loss differential of 9.2 percentage points between the bottom and the top income decile. The adverse distributional impact of the inflationary shock was largely offset by government policies, with a welfare loss of only 2.9% remaining for the population as a whole. Fiscal measures were shown to close the inflation gap and mitigated the welfare loss differential between the poor and the rich to just 0.7 percentage points. Price measures were dominant vis-à-vis their income counterparts in compensating for welfare losses across the income distribution and, most interestingly, had a significant progressive impact largely driven by the electricity subsidy, as the support provided was inversely related to consumption. However, given that they were not as well-targeted to low-income households, they were relatively cost-inefficient when compared with income measures. Nonetheless, the efficiency advantage of income measures may be severely undermined in the presence of extensive tax evasion, which points not only to the need for a careful design of targeted measures, but also to complementarities with structural reforms fighting tax evasion.

Vertical and horizontal equity of wealth taxes: An assessment from a joint income-wealth perspective

Despite an established theoretical literature on (optimal) wealth taxation, the empirical literature is still scarce. Previous studies usually focus on country case studies and a specific type of wealth tax in isolation. This paper analyses from a cross-country perspective the distributional effects of the mix of taxes on wealth, on capital income and on transfers of wealth. Moreover, we use the joint distribution of income and annuitised wealth as our analytical framework. To this end we combine data of the Eurosystem Household Finance and Consumption Survey with the tax-benefit microsimulation model EUROMOD, covering six countries: Belgium, Germany, France, Finland, Italy and Spain. Results indicate that existing wealth taxes do not contribute to vertical and horizontal equity: they are often progressive but do not achieve any significant redistribution due to the low revenues they generate and they imply a much lower burden on those deriving their living standard predominantly from wealth than on those who derive it mainly from income.

Differences in COVID-19 Policies and Income Distribution: A Cross-Country Comparison

This paper looks at the distribution of disposable income by deciles to indicate how specific mitigating measures have influenced income groups and considers the effectiveness of different combinations of containment measures in the European Union. Simulations using the EUROMOD tax-benefit microsimulation model imply that the mitigating effects of the simulated measures are regressive, with a bigger influence on the bottom part of the income distribution. It is also observed that old democracies benefit from these measures more than new democracies. Surprisingly, our results further reveal that for the two highest decile income groups, the COVID-19 containment measures are stronger in new democracies. Finally, a qualitative comparative analysis of 19 EU countries suggests that each country should apply mixes of containment measures that fit its own context. Although there is no one-size-fits-all policy, old democracies seem more successful at handling the consequences of the COVID-19 crisis than new democracies. This study complements the literature as it shows how COVID-19 measures have influenced household income groups, and second, it adds to earlier studies by clarifying that only specific context-dependent combinations of containment measures are successful at preventing the loss of people’s living standards, thereby giving policymakers the necessary leeway to formulate effective policies.

The distributional impacts of the COVID-19 crisis and policy response in Russia

The outbreak of COVID-19 has had severe negative economic impacts on households and businesses in Russia. Russia’s GDP declined by 2,7% in 2020. To mitigate the adverse impacts of the pandemic, in March—June 2020 the govern- ment implemented a number of fiscal and social policy measures aimed at support- ing businesses, employment and incomes of vulnerable groups of the population. This paper presents the results of the impact assessment of the COVID-19 crisis and the related policy interventions on the income distribution and poverty in Russia in 2020. The analysis is based on the tax-benefit microsimulation model for Russia, which allows for assessing the redistributive effects of direct and indirect taxes and transfers in Russia at the federal and regional levels. We find that the net effect of the crisis and policy interventions was strongly progressive at the bottom of the income distribution and equalizing across regions.

PERSONAL INCOME TAX POLICY TOWARD SUSTAINABILITY AND FAIRNESS

Tax-benefit microsimulation models can be utilized to address a range of policy questions. In Vietnam, the personal income tax system has seven tax brackets, but its current progressive taxation has been deemed unreasonable due to its numerous steps with narrow intervals, resulting in abrupt tax step jumps. To improve the competitiveness of the economy in attracting foreign experts and skilled workers and incentivize labor efforts, we have proposed three scenarios for personal income tax brackets in Vietnam. The results indicate that a change in tax brackets, which involves increasing tax revenue and reducing inequality, is the more favorable option. However, changing the base tax deduction and additional tax deduction per dependent did not lead to desirable outcomes. These findings emphasize the importance of designing tax policies that achieve multiple objectives and are tailored to the specific circumstances of the situation.

UMA RENDA BÁSICA UNIVERSAL PARA O BRASIL: EFEITOS FISCAIS E DISTRIBUTIVOS DE ESQUEMAS AALTERNATIVOS

ABSTRACT The Covid-19 pandemic outbreak has led to an increasing interest in universal basic income (UBI) proposals, as it exposed the inadequacy of traditional welfare systems to provide basic financial security to a large share of the population. In this paper, we use a static tax-benefit microsimulation model to analyse the fiscal and distributional effects of the hypothetical implementation in Brazil of alternative UBI schemes that partially replace the existing tax-transfer system. The results indicate that introducing a UBI/Flat Tax system in the country could be both extremely effective in reducing poverty and inequality and economically viable.

How could Croatia reform tax-benefit policies for families with children: tackling distributional effects

: Policies aimed at the family are an important tool for governments to achieve various goals to improve society, manage populations, enhance well-being, and reduce inequality, among other things. Choosing an optimal policy design often constitutes a compromise between different goals and priorities. The Croatian tax allowance for dependent children has often been criticised in the literature for its regressivity, and opacity due to a lack of parliamentary oversight. There is room to improve the child benefit allocation. This research investigates whether Croatia could reform its policies on child benefit and tax allowance for dependent children without increasing the budget, based on family policies that have been implemented in Greece, Germany, the Slovak Republic, Sweden and the United Kingdom. EUROMOD, a widely used European tax-benefit microsimulation model, is used to assess the differences in structure and distributional effects of these 'imported' policies in Croatia. The results highlight that imported policies would make support to families with children more equitable and reduce child poverty.

The Lock-in Effect of Marriage: Work Incentives after Saying “I Do”

In this paper, we use EUROMOD, the tax-benefit microsimulation model of the European Union, to investigate the impact of marriage-related tax-benefit instruments on the financial incentives to work of married couples. For each spouse, we estimate their individual marginal effective tax rate and net replacement rate before and after marriage. We show that the marriage bonus, which is economically significant in eight European countries, decreases the work incentives for women, particularly on the intensive margin. In contrast, for men the incentives on the intensive margin increase once they are married, pointing to the marriage-biased and gender-biased tax-benefit structures in the analysed countries. Our results suggest that marriage bonuses contribute to a lock-in effect, where second earners, typically women, are incentivised to work less, with negative economic consequences.

Family as a redistributive principle of welfare states: An international comparison

Redistribution is one of the main characteristics of the welfare state, and welfare state research has dealt intensely with various facets of it. The main focus in analysing redistribution is on the redistributive logics of welfare states in terms of work-related rights. Family as a major principle of welfare state redistribution, though, has hardly been included in these welfare state analyses. It has mainly been addressed by analysing outcome data or by analysing care as the most relevant characteristic of the family. We argue, though, that comparative welfare state analysis that addresses differences in welfare state intended redistribution needs to also include family as a redistributive principle to gain a more complete picture of societal redistribution. In this study, we are analysing the redistributive logics of welfare states in terms of family. We answer the question of how and in how far welfare states institutionalize family as a redistributive principle. We examine by means of the tax–benefit microsimulation model EUROMOD and its Hypothetical Household Tool (HHoT) welfare state regulations on family for three countries that are generally classed as different regime types. We differentiate between a great variety of family forms (referring to marital status, children and different forms of couples’ income distribution) to adequately test our theoretical assumptions. The findings show that family is a major redistributive principle of the welfare states analysed here and applied in different redistributive logics to the various family forms. This, then, results in an increase in income for certain family forms and a decrease in income for other family forms. These differences are not the result of one coherent set of regulations, but of an interplay of in part contradictory regulations that reflect a great variety of family-related redistributive logics within the single countries. Thus our study provides new insights into the redistributive logics of welfare states, and may contribute to the analysis of welfare state complexity in terms of theory, methodology and empirics.

The redistributive power of cash transfers vs VAT exemptions: A multi-country study.

Like high-income countries, low- and middle-income countries (LMICs) offer reduced rates and exemptions on particular goods and services in their value-added tax (VAT) systems. These policies are often motivated by distributional concerns and target items thought to take up a larger share of the budgets of poorer households. This paper explores the effectiveness of such policies in six LMICs. We estimate their impact on tax revenues, inequality and poverty, and compare these effects to existing cash transfer schemes and a hypothetical Universal Transfer (UT) funded by broadening the VAT base. To do so, we use tax-benefit microsimulation models incorporating input-output tables, allowing us to estimate the impact of exemptions on consumer prices due to VAT embedded in supply chains. We show that although preferential VAT rates reduce poverty, they are not well targeted towards poor households overall. Existing cash transfer schemes are better targeted but generally have limited coverage. A UT funded by a broader VAT base would create large net gains for the poorest households, reducing inequality and most measures of extreme poverty in each of the countries studied. Our results suggest that the widespread practice of providing special VAT treatment to certain goods and services is an expensive way of reaching poor households. In principle, expanding the VAT base and social protection schemes in tandem has the potential to both raise tax revenues and reduce poverty. Such reforms therefore warrant consideration for LMICs as they pursue Domestic Revenue Mobilisation and broader development objectives.

Nowcasting poverty and inequality in the context of economic growth and Covid-19 pandemic in Lithuania

The purpose of this article is to present a methodology and results for nowcasting poverty and inequality indicators during economic growth and the Covid-19 pandemic in Lithuania. Nowcasting combines the techniques of tax-benefit microsimulation and calibration of the survey weights. For the microsimulation, the tax-benefit microsimulation model EUROMOD is used together with its additional components for Lithuania, which were developed by the Ministry of Social Security and Labour of the Republic of Lithuania. Three economic forecasts, developed by the Bank of Lithuania for 2020, are used: the rapid V-shaped recovery scenario, intermediate U-shaped recovery scenario and a slow extended U-shaped recovery scenario. The results show Lithuania's favourable tendencies in reducing poverty and inequality in the general population and by age groups in the context of rapid economic growth and improving the improved labour-market situation in 2018–2019. The results of 2020 suggest that relative at-risk-of-poverty rates and inequality in the country are likely to decline. The foreseen decrease in the at-risk-of-poverty rate is primarily due to reducing poverty risk among older people and children. The most vulnerable age groups include youth (18–24 years) and the elder working-age population (50–64 years). Poverty rates for these groups are likely to increase in 2020. However, it should be noted that the at-risk-of-poverty rates had also declined in Lithuania during the first years of the previous economic crisis. Decomposition of demographic/employment changes and policy effects for 2019–2020 show that due to demographic and employment changes, poverty and inequality is likely to increase in Lithuania in 2020. The impact of the policy effect is progressive, more favourable to the less well-off, leading to a reduction in poverty. Progressiveness is due to the fact that during the quarantine period, flat benefits were provided to a large part of the society: children, pensioners, job-seekers, self-employed.

Family as a Redistributive Principle of the Welfare State. The Case of Germany

AbstractFamily is one of the major principles of welfare state redistribution. It has, however, rarely been at the centre of welfare state research. This contribution intends to help remedy the research gap in family-related redistribution. By examining the German welfare state which is known to be both redistributive and family-oriented, we want to answer the question of how and how far the German welfare state institutionalises family as a redistributive principle. Our case-study of German welfare state regulations in terms of family is based on the tax-benefit microsimulation model EUROMOD and its Hypothetical Household Tool (HHoT). We differentiate 54 family forms to adequately reflect our three theoretical assumptions, which are: (1) redistributive logics differ across family forms, and in part markedly; (2) these differences are not the result of one coherent set of regulations, but of an interplay of partially contradictory regulations; (3) family as a redistributive principle manifests itself not only in terms of additional benefits to families, but also in terms of particular obligations of families to financially support family members before they are entitled to public support. These aspects have hardly been analysed before and combining them allows a clear evaluation of family-related redistribution.

Distributional effects of macroeconomic shocks in real-time

The highly dynamic nature of the COVID-19 crisis poses an unprecedented challenge to policy makers around the world to take appropriate income-stabilizing countermeasures. To properly design such policy measures, it is important to quantify their effects in real-time. However, data on the relevant outcomes at the micro level is usually only available with considerable time lags. In this paper, we propose a novel method to assess the distributional consequences of macroeconomic shocks and policy responses in real-time and provide the first application to Germany in the context of the COVID-19 pandemic. Specifically, our approach combines different economic models estimated on firm- and household-level data: a VAR-model for output expectations, a structural labor demand model, and a tax-benefit microsimulation model. Our findings show that as of September 2020 the COVID-19 shock translates into a noticeable reduction in gross labor income across the entire income distribution. However, the tax benefit system and discretionary policy responses to the crisis act as important income stabilizers, since the effect on the distribution of disposable household incomes turns progressive: the bottom two deciles actually gain income, the middle deciles are hardly affected, and only the upper deciles lose income.

Isplativost rada u Hrvatskoj i Sloveniji: analiza pomoću mikrosimulacijskog modela

WORK INCENTIVES IN CROATIA AND SLOVENIA: ANALYSIS USING MICROSIMULATION MODELS The paper analyzes the impact of the tax-benefit system on work incentives in Croatia and Slovenia. Unemployed and inactive persons and their hypothetical transitions to employment are considered. As the main indicator of work incentives, the participation tax rate (PTR) is estimated, as it represents a portion of additional income that is lost because taxes increase and benefits decrease in transition of a person from non-employment into employment. Unlike previous research, which was made for both countries on hypothetical data, in this paper for the first time the calculations and analysis of PTR are based on survey data, which for both countries gives a realistic picture of the situation in the field of work incentives. The analysis is carried out on data and the tax-benefit system for 2017, and the main tool used is EUROMOD, a tax-benefit microsimulation model for the EU countries. The results show that the average PTR in Croatia is of a moderate size of 31.3%, while in Slovenia it is 11.3 percentage points higher. People with higher number of dependent children and those with lower level of market income obtained by other household members are more likely to have a high PTR in both countries, and in Croatia people with only primary education will also have it. Key words: participation tax rate, work incentives, EUROMOD, Croatia, Slovenia

The Benefit non-take-up in the Context of Cash Social Assistance Reform in Lithuania

The purpose of this article is to present the results of cash social assistance (CSA) benefit non-take-up in the context of the CSA system reform in Lithuania. The right to adequate minimum income benefits is one of the 20 key principles under the European Pillar of Social Rights (EPSR). Using the tax-benefit microsimulation model EUROMOD we seek to identify all those eligible to CSA benefit and to analyse its non-take-up rates in Lithuania. The analysis for 2016 showed that CSA benefit non-take-up in Lithuania was around 22%. This means that around one fifth of those who are entitled to this benefit do not get it for various reasons. The results show that there are two types of households, with a non-take-up rate exceeding 30%: single person and lone parent households. The dynamics of CSA benefit non-take-up between 2007-2016 were strongly negatively correlated to the annual average number of recipients of the CSA benefit. This makes for a counter-cyclical dynamic of the CSA non-take-up relative to the economic growth cycle. We find some evidence of an increase in the CSA non-take-up rate following the recent CSA reform in Lithuania. Further analysis is needed to distinguish between the effects of the economic cycle and the CSA reform.

Pobreza y desigualdad en Ecuador: modelo de microsimulación de beneficio fiscal

El objetivo de este artículo es presentar Ecuamod, el modelo de microsimulación de beneficios fiscales para Ecuador. Un modelo de microsimulación estática que combina reglas detalladas de política de país con microdatos representativos de la Encuesta nacional de ingresos y gastos de hogares urbanos y rurales (Enighur 2011-2012) para simular derechos de beneficios en efectivo, impuesto sobre la renta personal y pasivos de cotización a la seguridad social, así como IVA e impuestos especiales para el periodo de 2011 a 2017. Se analiza la importancia relativa de los componentes de los beneficios fiscales en la distribución del ingreso y el efecto de los instrumentos de impuestos sobre la pobreza y la desigualdad de los ingresos.