Supporting fiscal policy with microsimulation analysis

Michał MyckCentre for Economic Analysis, CenEAKiev, 24.04.2015

Microsimulation in policy analysis

• Tax and benefit system as the key policy tool of all governments:– importance of the distribution of tax burden, – relationship between different types of taxes and benefits,– role of the system for labour market incentives and more generally for economic

efficiency.

• Microsimulation approach as a complex way to analyse the system:– detailed coding of tax and benefit regulations, – representative household data (and synthetic data).

• The Polish microsimulation model SIMPL:– examples of recent policy analysis:

• support for families with children,• distribution of the VAT burden among households.

Microsimulation model:• Combines detailed regulations governing tax and benefit system

and a representative database of households:• analyses of the impact of changes in taxes and benefits on household

incomes, and costs of reforms for public finance sector;• SIMPL model based on data from the Polish Household Budget Survey;• extended to include an expenditure module for the purpose of VAT analysis.

• Models commonly used in other countries (e.g., the USA, the UK, France, Germany, Spain, the Netherlands) by government administration and research institutes (e.g.: IFS, DIW, ISER, IZA, PSE).

• SIMPL model structure (in total, approx. 6300 lines of code):• tax and benefit system codes;• model databases (stylized households and microdata – the HBS).

SIMPL Microsimulation Model

Social Sec. Health Ins.

moduleTax module

Family benefits module

Housing benefit module

Social assistance

module

HH demographics, incomes, labour market

Information about dwelling unit, assets, agricultural farm, etc.

=> DISPOSABLE INCOME

Information about HH expenditures VAT module

=> VAT BURDEN

SIMPL Microsimulation Model

SIMPL Microsimulation Model

Financial support for families with children in Poland:

• family benefits (FB); • tax advantages: child tax credit (CTC) and joint taxation for

lone parents.

• Who gets what?• Identification of problems with the system and recent

reforms + reforming the system.

)( ,0 DnjjDjj PITHIPITHIFBFFS

SIMPL Microsimulation Model

Financial support for families with children in PolandMarried couples with one, two and three children

0

100

200

300

400

500

600

Wsp

arci

e ro

dzin

w s

yste

mie

(PLN

/mie

si¹c

)

0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000Dochód brutto w rodzinie

(PLN/miesi¹c)

1 2 3Liczba dzieci w rodzinie:

SIMPL Microsimulation Model

Financial support for families with children in PolandAverage support per child in income groups:

1 2 3+

1 2 3+

1 2 3+

1 2 3+

1 2 3+

1 2 3+

1 2 3+

1 2 3+

1 2 3+

1 2 3+

0

20

40

60

80

100

120

140

160

180

Decile 1 Decile 2 Decile 3 Decile 4 Decile 5

Family Benefits Tax advantages

Decile 6 Decile 7 Decile 8 Decile 9 Decile 10

Va

lue

s o

f fa

mily

su

pp

ort

(P

LN

/mo

nth

)

SIMPL Microsimulation Model

Financial support for families with children in PolandTaking advantage of the child tax credit (CTC):

SIMPL Microsimulation Model

Family Benefits and the labour marketPoint withdrawal of benefits:

Level of benefits/month Disposable income/month

Single-earner family with one, two and three children (Myck et al. 2014)

SIMPL Microsimulation Model

Recent reforms:

• Extending support through the Child Tax Credit• CTC turned into a refundable credit with refunds limited by the amount of

health insurance and (employee’s) social security contributions;• higher maximum values of the CTC for families with three and more children• total cost estimates: about 1.5bn PLN.

• Tapered withdrawal of Family Benefits (from 2016):• benefit taper set at 100%;• total cost estimates: 0.4bn PLN.

SIMPL Microsimulation Model

Financial support for families with children in PolandCTC reform – advantages for families:

SIMPL Microsimulation Model

Financial support for families with children in PolandFamily Benefits reform – changes in withdrawal taper:

SIMPL Microsimulation Model

Financial support for families with children in PolandCombined effects of CTC and Family Benefits reforms:

Current and reformed systems: family with two children

SIMPL Microsimulation Model

Financial support for families with children in PolandCombined effects of CTC and Family Benefits reforms:

Distributional effect in households with children

As result of the two reforms support for families with children increased by approx. 2bn PLN per year (increase of 12%).

SIMPL Microsimulation Model

Modelling VAT in SIMPL:

• VAT and household expenditures:• applicable VAT rates allocated to each category of expenditures in the HBS;• net expenditure amount = gross amount divided by (VAT rate +1);• VAT = net expenditure amount multiplied by applicable VAT rate.

• VAT paid on all expenditure items aggregated at household level.• Amounts are grossed up using population weights.• Total annual VAT paid by households in HBS 2012 = PLN 60.3 billion.

Bread:gross: PLN 20.00

Net:PLN 19.05

VAT 2012: PLN 0.95

VAT 2010: PLN 1.33

5% VAT

5% VAT

7% VAT

The VAT in households in relations to income groups:

VAT in Poland: 2011-2016

Amount of direct VAT burden:

(PLN/month and % of income)

Proportion of direct VAT burden by VAT rate:

Implementing single rate VAT system in PolandDistributional consequences:

Single rate of VAT?

Budget (HH burden) neutral rate of 15.5%

Revenue increasing rate of 17% (8.2bn/12.8bn)

Summary:

• Microsimulation allows a comprehensive approach to the tax and benefit system:

• distributional analysis;• ex-ante policy evaluation;• implications for labour market incentives;• identification of inefficiencies.

• Implications with potentially significant benefits for the economy as a whole.

• Effective tool for communication of policy implications and attracting attention of media and policy makers:

• a powerful tool for analysis of proposals (in particular in elections) and policy options.

• High quality individual level data as a key requirement for building a microsimulation model (demographics, incomes, consumption).

Microsimulation in policy analysis

Summary: • Importance of good micro-level data for policy evaluation and monitoring of

transition processes:• distributional issues are key for the success of major economic reforms;• good micro-level data often turn out to be most useful unexpectedly (e.g. for

before and after comparisons).• Importance of a complex approach to welfare at the micro level:

Micro-level data on 50+ populations: Survey of Health, Ageing and Retirement in Europe (SHARE); Health and Retirement Study (US), English Longitudinal Study of Ageing (ELSA), China Health and Retirement Study (CHARLS).

Microsimulation in policy analysis

Health(physical and mental)

Family and social networks

Economic factors (income, employment, assets)