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Assessing changes of the tax-transfer      system: A new general equilibrium               microsimulation approach      P...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions  ....    ...
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Péter Benczúr, Gábor Kátay, Áron Kiss. Assessing changes of the tax-transfer system: A new general equilibrium microsimulation approach

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Magyar Nemzeti Bank
June 2012

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Péter Benczúr, Gábor Kátay, Áron Kiss. Assessing changes of the tax-transfer system: A new general equilibrium microsimulation approach

  1. 1. Assessing changes of the tax-transfer system: A new general equilibrium microsimulation approach Péter Benczúr Gábor Kátay Áron Kiss Magyar Nemzeti Bank June 2012 . MAGYAR NEMZETI BANK.
  2. 2. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Public finance: the impact of taxation • What and why should we know about behavioural responses to taxation? effectiveness and efficiency of government interventions • What can we do if we know them? Can use them in micro-based predictions for tax and welfare reforms . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 2MAGYAR NEMZETI BANK
  3. 3. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Taxation • Standard approach: need to generate some revenue Collect taxes on various economic transactions like sales, corporate and personal income Ideal setup: ”lump sum taxation” - regardless of individual choice Reality: taxes influence prices, thus choices - a source of potential inefficiency How to minimize the efficiency loss? • Variant 2: want to redistribute income Again a loss due to distorted individual choices Need to tradeoff efficiency vs equity • The sensitivity of individual behavior to taxes is always a key ingredient of the evaluation . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 3MAGYAR NEMZETI BANK
  4. 4. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Elasticities and efficiency losses price price demand demand p1consumer p1consumer tax tax supply supply p0 = p1producer p0 = p1producer q1 q0 quantity q1 q0 quantity Lost consumer surplus - Revenue gain = Welfare loss . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 4MAGYAR NEMZETI BANK
  5. 5. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Public finance at a central bank? • Fiscal policy becoming (even more) important Budget consolidation needs will put pressure on minimizing the GDP loss A strong impact on economic performance, both at a business cycle (”gap”) and growth (”trend”) frequency ”DG Research will have to expand its research capabilities in the areas of [...] fiscal policy issues in the European Union.” (from the External Review) • Hungary in particular: Very low participation rates (around 62%) We identified this as the most important bottleneck to real convergence Recent and future fiscal reforms are centered around labour market activity . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 5MAGYAR NEMZETI BANK
  6. 6. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Tax, transfer and labour supply • Adjustment at the intensive and the extensive margin • Marginal Tax Rate (MTR): tax rate on the last unit of income it should discourage work activity (”substitution” effect) • Average Tax Rate (ATR): total taxes per total income it may encourage activity (”income” effect) it also influences the overall payoff from taking up a job (”participation tax rate”) . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 6MAGYAR NEMZETI BANK
  7. 7. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Impact of a tax change - figures c c Ui c=wl+T Ui c=wl+T Ui Ui c=wl+T c=wl+T T T l he hf he l he hf (a) Intensive margin (b) Extensive margin . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 7MAGYAR NEMZETI BANK
  8. 8. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Transfers • Show both aspects: Marginal: ◃ Means tested benefits with gradual phase-out ◃ Every extra euro earned as wage reduces transfers by 20% is equivalent to a 20% extra MTR Participation tax rate: ◃ The total amount of lost transfers decrease the payoff from work ◃ The relevant concept is the change in disposable income due to getting a job . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 8MAGYAR NEMZETI BANK
  9. 9. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Impact of transfers - figure c Ui c=wl+(T-ΔT) T T-ΔT l l* . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 9MAGYAR NEMZETI BANK
  10. 10. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Labour supply at the intensive margin • Hours worked: Very little behavioral response for primary workers Slightly bigger effect on how much secondary earners work • Total taxable income: Quite substantial elasticities in many countries (around 0.4), higher for high earners Hungary: Bakos et al (2008) and Kiss-Mosberger (2011)... ... small elasticity for the whole population (0.065) ... much higher for top 20% earners: 0.35, or for the top 5%: 0.2 ... income effect is also important for the top earners:−0.27 . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 10MAGYAR NEMZETI BANK
  11. 11. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Labour supply at the extensive margin • Hardly comparable results across studies and countries special subgroups (mostly secondary earners, married women...) the way after-tax wages are controlled for varies across studies mostly reduced form, program evaluation methodology • Taxes and transfers rarely taken simultaneously into account lost transfers are the main parts of the budget constraint of many important subgroups: low-skilled, elders, maternity leave • Benczúr-Kátay-Kiss-Rácz (2012): such groups are highly responsive to tax and transfer changes; prime age (25-54) higher educated individuals are unresponsive at the extensive margin . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 11MAGYAR NEMZETI BANK
  12. 12. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Labour supply at the extensive margin (cont’d) working-age population prime-age (25-54) dy/dx std. err. dy/dx std. err. full sample net wage 0.341 0.036 0.095 0.012 transfer -0.157 0.016 -0.056 0.007 elementary school or less net wage 0.399 0.088 0.333 0.040 transfer -0.171 0.038 -0.202 0.024 secondary education net wage 0.263 0.029 0.095 0.011 transfer -0.134 0.015 -0.058 0.006 tertiary education net wage 0.115 0.013 0.037 0.003 transfer -0.053 0.006 -0.021 0.002 elder (>=50) net wage 0.402 0.051 transfer -0.128 0.016 women at child-bearing age (25-49) net wage 0.178 0.020 transfer -0.111 0.012 prime-age, single men net wage 0.062 0.009 transfer -0.035 0.005 prime-age, single women net wage 0.121 0.017 transfer -0.072 0.010 prime-age, married men net wage 0.031 0.004 transfer -0.018 0.002 prime-age, married women net wage 0.240 0.024 transfer -0.147 0.015 . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 12MAGYAR NEMZETI BANK
  13. 13. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Our approach • Assessing the impact of tax and transfer reforms: Static effects (impact on incomes and the income distribution…) Labour supply effects (not short run “consumption effect”!) Long-run(!) general equilibrium effects (GDP, capital stock, employment…) Fiscal effects in the short-run and the long-run • With a microsimulation model ...that takes into account the labour supply decision ...both at the extensive and the intensive margin ...embedded into a small neoclassical macro model . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 13MAGYAR NEMZETI BANK
  14. 14. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Advantages of our approach • Relative to macro models: Household heterogeneity taken into account Nonlinearity of the income tax (even of a “flat tax”) Heterogeneous sensitivity to taxation • Relative to pure microsimulation models: Behavioural response incorporated General equilibrium also taken into account • Relative to dynamic microsimulation models Most models have either GE feed backs or behavioural responses Early behavioural models modelled only the intensive margin Many models use calibrated elasticities Information often flows only in only one direction . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 14MAGYAR NEMZETI BANK
  15. 15. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Overview of the model - extensive margin • Calculate pre- and post-reform net wages Observed wage for the employed Predicted wage for the unemployed • Calculate pre- and post-reform hypothetical transfers • Assess the pre- and post-reform probability of activity (P (ai = 1)) • The change in the weighted sum of individual probabilities ∑ ( i si P (ai = 1)) gives the aggregate labour supply shock at the extensive margin (employment) . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 15MAGYAR NEMZETI BANK
  16. 16. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..The model - intensive margin • Calculate pre- and post-reform (1 − MTR) and (1 − ATR) • Pre-reform “work intensity” is normalized to 1, post-reform value (hi ) is given by the labour supply equation at the intensive margin • We take into account individuals’ productivity (ωi ) • We iterate until convergence . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 16MAGYAR NEMZETI BANK
  17. 17. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..The macro model • The “effective” aggregate labour supply shock (extensive + ∑ ∑ intensive) is: si P (ait = 1) ωi hi − si P (ait−1 = 1) ωi • This will feed into a small neoclassical macromodel: marginal revenue = marginal cost capital supply is (almost) perfectly elastic (small open economy) gross wages adjust perfectly in the long-run steady-state to steady state static fiscal effects also reflect steady-state values • Short-run dynamics behind the model after tax cut: 1. gross wages decrease, thus, return on capital exceeds the required rate of return 2. demand for capital and labour adjust 3. factor prices slowly return to their original levels . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 17MAGYAR NEMZETI BANK
  18. 18. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..What reforms are we looking at? • Three versions of a personal income tax cut (0.8% of GDP) Across the board rate cut “Flat tax” with a zero bracket “Flat tax” with a wage tax credit • Three tax reorganizations (reshuffling 0.8% of GDP) Increasing the corporate tax rate, decreasing the PIT Increasing the effective retirement age, PIT cut Increasing the effective retirement age, corporate tax cut • Tax and transfer reforms 2008-10 and 2010-12 . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 18MAGYAR NEMZETI BANK
  19. 19. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Hypothetical PIT scenarios Across-the-board 2 tax rates (0% + 29.5%) 1 tax rate (23%) + tax credit static dynamic static dynamic static dynamic Effective labour 0.9% 1.7% 3.2% Employment 0.7% 0.0% 0.3% Capital stock 0.8% 1.3% 2.6% GDP 0.9% 1.5% 2.9% Average gross wage -0.1% -0.1% -0.3% Disposable income 2.9% 3.4% 4.5% Personal income tax -235 -214 -240 -197 -246 176 Employee contributions 0 14 0 23 0 45 Employer contributions 0 24 0 44 0 91 VAT 43 51 44 60 45 79 Capital taxes 0 6 0 10 0 19 Local business tax 0 4 0 7 0 14 Transfers 0 9 0 1 0 -3 Change of budget balance -192 -107 -197 -52 -201 69 . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 19MAGYAR NEMZETI BANK
  20. 20. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Hypothetical tax & transfer scenarios capital tax increase restricted early restricted early + labour tax cut retirement + labour tax retirement + capital cut tax cut static dynamic static dynamic static dynamic Effective labour 2.7% 4.8% 2.3% Employment -0.2% 2.1% 2.3% Capital stock -4.9% 3.9% 8.8% GDP 0.0% 4.5% 4.6% Average gross wage -3.3% -0.4% 2.9% Disposable income 2.2% 3.2% 0.9% Personal income tax -246 -268 249 -151 -12 135 Employee contributions 0 -11 1 71 1 84 Employer contributions 0 -22 0 132 0 156 VAT 45 38 3 56 -40 15 Capital taxes 234 216 0 29 -234 -188 Local business tax 0 0 0 21 0 21 Transfers 0 -10 229 228 231 239 Change of budget balance 33 -56 -16 385 -54 463 . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 20MAGYAR NEMZETI BANK
  21. 21. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Actual measures 2008-2010 and 2010-2012 • Both periods: Increase in (employee-side) contributions Increase in VAT (20 to 25 to 27%) Measures to postpone retirement • 2008-2010: PIT cut for middle-income individuals Cut in employer-side contributions • 2010-2012: PIT cut for high-income individuals PIT increase for low income earners, cut for families w. children Corporate tax cut Extraordinary “crisis” taxes on banks, telecom, retail Cut in unemployment benefits (12 months to 3 months) . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 21MAGYAR NEMZETI BANK
  22. 22. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..2008-10 and 2010-12 2008-2010, 2008-2010, 2010-2012, 2010-2012, without with without with pension pension pension pension measure measure measure measure static dynamic static dynamic static dynamic static dynamic Effective labour 1.6% 3.6% 3.4% 5.2% Employment 2.3% 4.7% 0.6% 2.3% Capital stock 1.2% 3.0% 5.9% 7.3% GDP 1.4% 3.4% 4.3% 5.9% Average gross wage 4.1% 4.0% 1.1% 0.9% Disposable income 5.6% 4.4% 2.4% 1.1% Personal income tax -333 -217 -337 -185 -322 -241 -321 -215 Employee contributions 3 89 4 126 136 214 137 244 Employer contributions -560 -418 -560 -368 0 116 0 154 VAT 179 247 129 227 177 242 125 213 Capital taxes 0 8 0 22 -103 -68 -103 -58 Local business tax -24 -18 -24 -9 0 19 0 26 Transfers 4 22 264 285 63 66 311 315 Change of budget balance -732 -287 -525 98 -48 348 149 680 . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 22MAGYAR NEMZETI BANK
  23. 23. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Hypothetical risk premium scenarios 0 pp 0.25pp 0.5 pp 1 pp “crisis taxes”; no r.p. shock Effective labour 3.4% 3.1% 2.8% 2.1% 2.9% Employment 0.6% 0.2% -0.1% -0.7% 0.0% Capital stock 5.9% 1.0% -3.7% -13.0% -1.9% GDP 4.3% 2.4% -0.5% -3.2% 1.2% Average gross wage 1.1% -0.9% -2.8% -6.5% -2.1% Disposable income 2.4% 0.8% -0.8% -3.8% -0.1% Personal income tax -241 -280 -319 -393 -303 Employee contributions 214 173 134 57 149 Employer contributions 116 53 -8 -126 16 VAT 242 208 174 109 187 Taxes on capital -68 -92 -115 -161 138 Local business tax 19 10 2 -14 5 Transfers 66 62 60 55 61 Total 348 135 -71 -474 253 . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 23MAGYAR NEMZETI BANK
  24. 24. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Effect on the income distribution • Substantial redistribution (static effect) Tax changes favored the high-income (mostly: above an annual income of 4M Ft) The elimination of wage tax credit and changes in transfers hurt low-income households • Income inequality measures (the Gini coefficient, p90/p10 etc. ratios): Move from a low level similar to Denmark and Austria to a medium level similar to Germany (EU average) This is the dynamic effect . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 24MAGYAR NEMZETI BANK
  25. 25. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Distributional impacts 2008 2010 2012 without with without with pension pension pension pension measure measure measure measure GINI 25.7 26.8 26.7 29.8 29.9 P90/P10 2.97 3.21 3.19 3.51 3.53 P90/P50 1.73 1.82 1.80 1.95 1.95 P50/P10 1.72 1.77 1.77 1.78 1.81 . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 25MAGYAR NEMZETI BANK
  26. 26. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..GINI index 40 35 30 25 20 Belgium Slovenia Denmark Cyprus Italy Portugal Finland Netherlands Greece Lithuania Latvia Malta Sweden Hungary Ireland Spain Poland Czech Republic Austria Luxembourg France Germany Estonia United Kingdom Bulgaria Slovakia Hungary (hypo) Romania EU-27 . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 26MAGYAR NEMZETI BANK
  27. 27. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..General conclusions 1. Our behavioural GE microsimulation model is able to assess effects of various tax and transfer changes. The dynamic effects are long-run, supply-driven Important to take taxes and transfers simultaneously into account 2. Tax cuts for high-income individuals may boost reported income and thus GDP but they do relatively little for employment 3. Low average taxes at low incomes increase employment 4. Cut back on transfers boosts the most employment + positive effect on budget deficit 5. In a small open economy, low taxes on capital and stable economic policy leads to increased capital inflows and GDP . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 27MAGYAR NEMZETI BANK
  28. 28. The broad research agenda Taxation and labour supply Empirical findings The model Simulation results Conclusions .... .... ... ..... ......... ..Specific conclusions 1. Tax cuts between 2008-2010 and 2010-2012 have very different long-run effects on GDP and employment. 2. Positive employment effects of the 2010-2012 package come exclusively from the cuts in unemployment benefit (Caveat!) 3. An increase in the risk premium on Hungarian real investment of 50 basis points has the potential to wipe out any positive growth effect of the 2010-2012 package 4. Making the “crisis taxes” permanent is equivalent to an increase in the risk premium between 25-50 basis points 5. Measures in both periods increased inequality, but the second period more. In terms of the Gini index, Hungary may move from a low-inequality state to close to the EU median. . Assessing tax and transfer changes - Benczúr, Kátay, Kiss (MNB) 28MAGYAR NEMZETI BANK

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