Welfare Benefits And Work Incentives: The Distribution Of Net Replacement Rates In Europe Using A Cross Country Microsimulation Model, EUROMOD

This paper considers the methodology of measuring replacement rates, comparing simulation based approaches, which simulate replacement rates for a representative sample of the population, with other approaches that simulate replacement rates for typical families or are entirely based on recorded household data. We emphasise the advantages of the first method. Utilising a cross-country microsimulation model for Europe, EUROMOD, we generate the distribution of replacement rates for four European countries, Denmark, France, Spain and the UK. In particular we show the important role of household composition and the presence of other household members' incomes in preserving the standard of living while out of work. We argue that, given this strong influence of primary incomes, replacement rates are not necessarily the best indicator of the impact of the taxbenefit system in this respect. To isolate the effects of the tax-benefit system on both work incentives and the degree of social protection for the out-of-work population, we therefore introduce a new measure, the tax-benefit-to-earnings ratio.European Union, Microsimulation, Net Replacement Rate, Unemployment Benefits, Work Incentives

The Impact Of Inflation On Income Tax And Social Insurance Contributions In Europe

Inflation can alter the characteristics of tax- and contribution systems in numerous ways. This paper demonstrates how inflation alters the distributive properties of nominally defined tax systems and looks at the impact of the tax revenues and social insurance contribution receipts generated. It provides quantitative estimates for Germany, The Netherlands and the UK, using a preliminary version of EUROMOD, a European tax-benefit microsimulation model. The integrated framework provided by the model permits the use of common income concepts across countries and therefore enables one to make informative comparisons of the distributive consequences of the inflation induced erosion of tax-band limits, thresholds, deductions, tax credits, etc. The paper also tests the performance of automatic indexing regimes used in two of the countries.European Union, Microsimulation, Inflation, Income Tax, Social Insurance Contributions

Towards a multi-purpose framework for tax-benefit microsimulation: lessons from EUROMOD

Tax-benefit models provide tools for policy analyses that should enable researchers to focus their attention on formulating policy scenarios and analysing their effects. From the users? and the developers? points of view, numerous characteristics and features are desirable to maximise the model?s usefulness. A model framework that offers generalised components essential for tax-benefit modelling while at the same time providing a large degree of flexibility in defining the specific parameters can be re-used for a multitude of modelling purposes. This paper discusses issues arising in the construction of such a general framework and illustrates possible approaches by reference to the the framework developed for construction of the EUROMOD tax-benefit model. EUROMOD is an integrated tax-benefit microsimulation model covering 15 (pre 2004) countries that are members of the European Union (Immervoll et al, 1999) as well as 4 of the New Member States. Implementing this many tax-benefit systems in one single consistent framework requires a robust yet flexible structure. The framework needs to reflect the basic structural characteristics of tax-benefit systems while leaving enough room for a diversity of particular instruments and rules. This paper outlines the general model framework adopted. We argue that, apart from its direct usefulness for EUROMOD, the framework has far wider applicability as a general approach to static tax-benefit microsimulation modelling.

Minimum-Income Benefits in OECD Countries: Policy Design, Effectiveness and Challenges

Almost all OECD countries operate comprehensive minimum-income programmes for working-age individuals, either as last-resort safety nets alongside primary income replacement benefits, or as the principal instrument for delivering social protection. Such safety-net benefits aim primarily at providing an acceptable standard of living for families unable to earn sufficient incomes from other sources. This paper provides an overview of social assistance and other minimum-income programmes in OECD countries, summarises their main features, and highlights a number of current policy challenges.social assistance, negative income tax, welfare to work, poverty

The impact of inflation on income tax and social insurance contributions in Europe

Inflation can alter the characteristics of tax- and contribution systems in numerous ways. This paper demonstrates how inflation alters the distributive properties of nominally defined tax systems and looks at the impact of the tax revenues and social insurance contribution receipts generated. It provides quantitative estimates for Germany, The Netherlands and the UK, using a preliminary version of EUROMOD, a European tax-benefit microsimulation model. The integrated framework provided by the model permits the use of common income concepts across countries and therefore enables one to make informative comparisons of the distributive consequences of the inflation induced erosion of tax-band limits, thresholds, deductions, tax credits, etc. The paper also tests the performance of automatic indexing regimes used in two of the countries.Inflation kann zu Veränderungen der Eigenschaften und der Wirksamkeit von Abgabensystemen fuehren. Dieser Beitrag analysiert, wodurch und in welchem Ausmass Inflation die Verteilungs- und Aufkommenscharacteristiken von Einkommensteuer und Sozialversicherungsabgaben beeinflusst. Mithilfe einer Vorabversion eines neuartigen europäischen Steuer-Beihilfen Mikrosimulations-modells (EUROMOD) werden die quantitativen Auswirkungen in Deutschland, den Niederlanden und Grossbritannien untersucht. Das Modell erlaubt unter anderem die Verwendung identischer Einkommenskonzepte für die verschiedenen Länder. Dadurch werden informative Ländervergleiche hinsichtlich der Verteilungsauswirkungen einer inflationsbedingten Aushöhlung von Progressionsstufengrenzen, Frei-, Absetz- sowie Absetzbeträgen möglich. Der Beitrag analysisert ausserdem die Wirksamkeit der automatischen Steuerindexierungsverfahren, welche in zwei der betrachteten Ländern Anwendung finden

Imputation of Gross Amounts from Net Incomes in Household Surveys. An Application using EUROMOD.

Household micro-datasets often do not contain information on gross incomes. We present an algorithm which exploits the tax- and contribution rules built into tax-benefit models to convert net income information into gross amounts. Using EUROMOD, a multi-country taxbenefit model covering all fifteen countries of the European Union, net-to-gross conversions can be performed for a large number of countries utilising existing models of relevant fiscal rules. The algorithm takes into account all relevant complexities of tax- and contribution rules and can, thus, produce much more accurate results than statistical models which estimate netto- gross ratios using only a few explanatory variables. Among the features of the algorithm is the ability to distinguish between different individuals in the same household. Even if individuals’ incomes are taxed jointly, the algorithm is able to approximate separate net-togross factors for individuals in the same fiscal unit. This is possible since EUROMOD can accurately assign people to appropriate fiscal units. In addition, it is in certain cases possible to produce different net-to-gross ratios for different income components. We undertake a case study to illustrate the importance of deriving separate net-to-gross factors for different individuals within a household/fiscal unit and for different income sources of the same individual.Microsimulation; Imputation; Income; Net/Gross

No Claim, No Pain: Measuring the Non-Take-up of Social Assistance Using Register Data

The main objectives of social assistance benefits, including poverty alleviation and labor-market or social reintegration, can be seriously compromised if support is difficult to access. While recent studies point to high non-take-up rates, existing evidence does not make full use of the information recorded by benefit agencies. Most studies have to rely on interview-based data, with misreporting and measurement errors affecting the variables needed to establish both benefit receipt and benefit entitlement. In this paper, we exploit a unique combination of Finnish administrative data and eligibility simulations based on the tax-benefit calculator of the Finnish authorities, carefully investigating the measurement issues that remain. We find rates of non-take-up that are both substantial and robust: 40% to 50% of those eligible do not claim. Using repeated cross-section estimations for years 1996-2003, we identify a set of stable determinants of claiming behavior and suggest that changes in behavior could drive the observed downward trend in take-up rates during the post-recession period. We discuss the poverty implications of our results.register data, take-up, social assistance, poverty

Reforming the Benefit System to 'Make Work Pay': Options and Priorities in a Weak Labour Market

Policies that support the unemployed, while reducing employment barriers and benefit dependency, are of particular interest in the current economic climate. This paper examines alternative policy approaches for combining adequate income support for the jobless with incentives to keep out-of-work spells short. After summarising the main parameters of existing income support measures for the unemployed in EU and OECD countries, I review evidence on the economic relevance of work incentives and discuss their significance when labour markets are weak during and after an economic downturn. Based on the available evidence, I propose a set of policy priorities to strengthen both the protection and the promotion functions of unemployment support

Household incomes and redistribution in the European Union: quantifying the equalising properties of taxes and benefits

The systems of direct taxes and cash benefits in the Member States of the European Union vary considerably in size and structure. We explore their direct impacts on cross-sectional income inequality (termed redistributive effect for the purpose of this paper) using EUROMOD, a tax-benefit microsimulation model for the European Union. This relies on harmonised household micro-data representative of each national population together with simulations of entitlements to cash benefits and liabilities for taxes and social contributions. It allows us to draw a more comprehensive and comparable picture of the combined effects of transfers and taxes than is usually possible. We decompose the redistributive effect of tax-benefit systems to assess and compare the effectiveness of individual policies at reducing income disparities. The following categories of benefits and taxes are considered both individually and in combination: income taxes, social contributions, cash benefits designed to target the poor or redistribute inter-personally (through means-testing) as well as cash benefits intended to redistribute intra-personally across the lifecycle (through social insurance or contingency-based entitlement). We derive results for the 15 old members of the European Union and present them for each country separately as well as for the EU-15 as a whole

Minimum wages, minimum labour costs and the tax treatment of low-wage employment

International comparisons of minimum-wage levels have largely focused on the gross value of minimum wages, ignoring the effects of taxation on both labour costs and the net income of employees. This paper presents estimates of the tax burdens facing minimum-wage workers. These are used as a basis for cross-country comparisons of the net earnings of these workers as well as the cost of employing them. In addition, results show the evolution of net incomes and labour costs during the 2000-2005 period and the relative importance of minimum-wage adjustments and tax reforms in driving these changes. Statutory minimum wages are in place in 21 OECD countries, ranging between USD 0.7 and USD 10 per hour. In a number of countries, minimum-wage levels have gone up in real terms in recent years. Given considerable tax burdens even at the lowest wage levels, tax policy measures can have a sizable impact on the net earnings available to low-wage workers. Social contributions and payroll taxes add, on average, around 18% to the cost of employing minimum-wage workers. The international variation of minimum labour costs in dollar terms is enormous, with hourly costs in the highest-cost country (the Netherlands) exceeding those at the bottom (Mexico) by a factor of 12. Differences are also large when compared across countries that are closer geographically or whose economies are more integrated. Despite reductions in non-wage labour costs in several countries, there has been no convergence of minimum labour costs in recent years. This paper is the working paper version of a chapter to appear in the 2007 edition of Taxing Wages, an annual OECD publication. The Taxing Wages chapter will include results for 2006