Stabilising E¤ects of Tax-Bene…t Systems in the EU
Counterfactual Simulations based on EUROMOD
Mathias Dolls (IZA)
Microsimulation for Policymaking in Times of Crisis
DG EMPL, Brussels, 21 November 2012
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Outline
Automatic Stabilisers and Economic Crisis: US vs. Europe
(with C. Fuest and A. Peichl, Journal of Public Economics, 2012)
Fiscal Union in Europe? Redistributive and Stabilising E¤ects
of a European Tax-Bene…t System and Fiscal Equalisation
Mechanism
(with O. Bargain, C. Fuest, D. Neumann, A. Peichl, N. Pestel and
S. Siegloch, IZA DP No. 6585, Presented at the 56th Economic
Policy Panel)
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Automatic Stabilisers
Background
Recent economic crisis has led to lower incomes and higher
unemployment
Tax bene…t system shall provide (temporary) income insurance
through build-in automatic stabilisers
Automatic stabilisers mitigate output ‡uctuations without
discretionary government action
I
I
progressive tax system
(unemployment) bene…ts
However, “very little work has been done on automatic stabilisation
[...] in the last 20 years” (Blanchard 2006)
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Automatic Stabilisers
Empirical approach
Simulation experiment: Calculate di¤erent shocks to gross income
and analyze how these shocks translate into changes of disposable
income
Requires tax-bene…t microsimulation models:
I
I
I
EUROMOD: 19 EU countries (EU-15 + Estonia, Hungary, Poland,
Slovenia)
NBER’s TAXSIM model: US
assume full bene…t take-up, no tax evasion, no behavioral responses
Micro vs. Macro approach: income stabilisation for population
subgroups
Models allow for exogenous variation in key parameters (avoid
identi…cation problems) =) disentangle automatic stabilisers
from discretionary …scal policy and behavioral responses
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Automatic Stabilisers
Results
Income Stabilization Coefficient
.6
.5
.4
.3
.2
.1
0
Income
Unemp.
EU
Unemp.
USA
FED Tax
SIC
Mathias Dolls (IZA)
Income
Counterfactual Simulations
State Tax
Benefits
Brussels, 21 November 2012
5 / 14
Automatic Stabilisers
Results
Income Stabilization Coefficient
Income
.8
.7
.6
.5
.4
.3
.2
.1
0
EE
GR
SP
PT
PL
USA
SI
UK
IT
FR
IR
LU
EU
FI
SW
HU
BE
EURO NL
AT
GE
DK
Unemployment
.8
.7
.6
.5
.4
.3
.2
.1
0
EE
GR
IT
PL
USA
PT
UK
NL
EU
FI
AT
BE
SW
SP
IR
SI
HU EURO FR
LU
GE
DK
FED Tax
SIC
Mathias Dolls (IZA)
Counterfactual Simulations
State Tax
Benefits
Brussels, 21 November 2012
6 / 14
Automatic Stabilisers
Conclusions
Amount of automatic stabilisation depends strongly on the type of
macro shock
Social transfers play a key role for stabilisation of disposable
income (con…rmed by the decomposition of stabilisation e¤ects, as
bene…ts absorb 19% of unemployment shock in EU-group vs. 7% in
the US)
Large heterogeneity within the EU
I
some Eastern and Southern European countries provide little income
stabilisation for low-income groups
Some evidence that countries with lower automatic stabilisers have
engaged in more discretionary …scal policy action
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Fiscal Union in Europe
Concerns
1
Massive redistribution from high to low income countries/individuals
2
Adverse e¤ects on incentives to work in the poorer countries as
people receive higher transfers
3
Adverse incentives to work in the richer countries as people face
higher tax burdens
4
Many other concerns like e.g. unequal compliance with tax law or
administrative issues (not analysed in this paper)
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Fiscal Union in Europe
Contribution
Quantitative analysis of two key elements of …scal integration:
Simulation experiment 1: Introduce an EU-wide integrated
tax-transfer system
I
I
I
Estimate the average EU system
Analyse redistributive and welfare e¤ects as well as impact on
automatic stabilisers
Redistribution (of income) across households
Simulation experiment 2: Introduce a system of …scal equalisation
based on taxing capacity of countries
I
I
Redistribution (of revenues) across countries
Impact on automatic stabilisation
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Redistributive e¤ects
-2
-20
0
Winner in %
20
40
60
0
2
4
6
Change disposable income in %
8
80
Fiscal Union in Europe
EU
AT
BE
FI
FR
GE
GR
IR
IT
NL
PT
SP
Winner in %
Change disposable income in %
Source: Own calculations based on EUROMOD.
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Automatic stabilisation
0
Income stabilization (IS) coefficient
.1
.2
.3
.4
.5
Fiscal Union in Europe
AT
BE
EU
FI
FR
GE
GR
IR
IT
NL
PT
SP
IS national tax and transf er systems
IS integrated system (1/3 EU average system)
IS integrated system and national credit constraints
Source: Own calculations based on EUROMOD.
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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EU Fiscal Equalisation System
Change equalisation payments in % of GDP reduction
-100
-50
0
50
Fiscal Union in Europe
AT
BE
FI
FR
GE
GR
IR
IT
NL
PT
SP
Source: Own calculations based on EU ROMOD.
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Conclusion
Introduction of a common tax and transfer system would lead to
signi…cant e¤ect on income redistribution and labour supply
Common tax and transfer system would create automatic …scal
stabilisers in the union
Replacing one third of the national tax and transfer systems would
provide ‘federal’automatic stabilisers of 10-15 per cent (USA: appr
25 per cent)
Introduction of a …scal equalisation scheme leads to large
redistributive e¤ects and has ambiguous implications for automatic
…scal stabilisers in the currency union; poor countries may be
destabilised
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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Conclusion
Thank you for your attention!
dolls@iza.org
Mathias Dolls (IZA)
Counterfactual Simulations
Brussels, 21 November 2012
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