the distributional effects of income tax expenditures · tax expenditure =tax concessions, tax...

The distributional

effects of income tax

expenditures

Silvia Avram

Holly Sutherland

ECFIN Taxation Workshop,

Brussels, 23rd October 2013

Motivation

Definitions and terms

Methodology

Results

Total tax allowances & credits

By type

Caveats and conclusions

Outline

Why tax expenditure?

Important element of income taxation systems

Total forgone revenues may be substantial

Distributional effects less well understood

Previous work:

measures and decomposition of the progressivity of the tax

system (Kakwani, 1977; Wagstaff et al., 1999; Wagstaff and Van

Doorsaler, 2001; Verbist, 2004)

US studies specific methodology and results (Toder et al.,

2009; Althuler and Dietz, 2011)

Not able to fully capture the interaction between the various

elements of the tax system (ex: tax concessions affect the ATR)

Not able to capture the interactions with the larger T-B system

Not able to differentiate instruments by their design

Motivation

Tax expenditure

=tax concessions, tax advantages

=provisions that decrease the net tax liability for some taxpayers

include general tax instruments / 0 band rates not distribution

neutral

Include provisions that may be classed as measurement of

“ability to pay”

Distinguish between:

Tax allowances= reductions in taxable income

Tax credits= reductions in the initial tax liability

Non-taxable income & special rates not covered

Deferred liability treated as an allowance

Definitions and terms

EUROMOD-simulation of income tax

simulation of entitlements based on household and individual

characteristics (SILC) and income tax rules (national legislation)

including most tax allowances and tax credits

(not actual payments)

not all tax allowances and credits simulated in EUROMOD

6 countries: CZ, DE, DK, ES, FR, IT

2010 income tax systems

Methodology (I)

Value of tax concessions (allowances/ credits):

Gross: difference in net tax liability due to tax concessions

(interaction with other elements of the income tax system)

Net: difference in household disposable income due to the tax

concessions (interaction with all other elements of the tax-benefit

system)

Dynamic decomposition elements do not sum to total!

Methodology(II)

Distinguish between:

General =universal instruments applicable to all tax payers (incl.

0 rate tax bands)

Family= instruments targeted to taxpayers with dependents

(children, spouses, parents etc.)

Vulnerable groups= instruments targeted at taxpayers (or

dependents) perceived to be economically insecure (ex:

disabled, elderly, lone parents etc.)

Income related= instruments inversely correlated with (taxable)

income

Types not exhaustive and not mutually exclusive!

Value calculated the same way as total (i.e. factoring in

the interaction between the various tax concessions)

Methodology(III)

Size: Annual expenditure on TA &

TC

Source: EUROMOD G 1.0+ & EUROSTAT (for total government revenue)

0,00

20,00

40,00

60,00

80,00

100,00

120,00

140,00

CZ DE DK ES FR IT

Tax expenditure as % of total income tax

Gross TA Net TA Gross TC Net TC

0,00

2,00

4,00

6,00

8,00

10,00

12,00

14,00

16,00

CZ DE DK ES FR IT

Tax expenditure as % gov. revenue

Gross TA Net TA Gross TC Net TC

Size: Proportion entitled by quintile

Note: Quintiles are based on household equivalised disposable income

when no tax allowances/ credits are present

Source: EUROMOD G1.0

0

20

40

60

80

100

120

All Q1 Q2 Q3 Q4 Q5

Tax allowances

CZ DE DK ES FR IT

0

20

40

60

80

100

120

All Q1 Q2 Q3 Q4 Q5

Tax credits

CZ DE DK ES FR IT

Concentration Curves 0

.2.4

.6.8

1

Cum

mu

lative a

llow

an

ces s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

CZ

DE

DK

ES

FR

IT

Equality0

.2.4

.6.8

1

Cum

mu

lative c

redits s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

CZ

DE

DK

ES

FR

IT

Equality

Tax allowances Tax Credits

Source: EUROMOD G1.0

Average TA as % of rank HDI

Note: Quintiles are based on household equivalised disposable income

when no tax allowances/ credits are present

Source: EUROMOD G1.0

0

5

10

15

20

25

All Q1 Q2 Q3 Q4 Q5

Tax allowances-gross

CZ

DE

DK

ES

FR

IT

-5

0

5

10

15

20

25

All Q1 Q2 Q3 Q4 Q5

Tax allowances- net

CZ

DE

DK

ES

FR

IT

Average TC as % of rank HDI

0

5

10

15

20

25

All Q1 Q2 Q3 Q4 Q5

Tax credits-gross

CZ

DE

DK

ES

FR

IT

0

5

10

15

20

25

All Q1 Q2 Q3 Q4 Q5

Tax credits-net

CZ

DE

DK

ES

FR

IT

Tax allowances Tax credits

Kakwani

Reynolds-

Smolensky

VE Kakwani Reynolds-

Smolensky

VE

CZ 0.3649 -0.0011 -0.001 -0.0859 0.0056 0.0086

DE 0.1247 -0.0127 -0.0116 - - -

DK -0.033 0.0038 0.0057 - - -

ES 0.0379 -0.0026 -0.0023 -0.0878 0.0078 0.0086

FR -0.0183 0 0.0014 0.0013 0 0

IT 0.1572 -0.0063 -0.006 -0.2842 0.024 0.0243

Progressivity/ redistribution

indices

General instruments 0

.2.4

.6.8

1

Cum

mu

lative a

llow

an

ces s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

DK

DE

FR

Equality

Concentration curve-General tax

allowances

0.2

.4.6

.81

Cum

mu

lative c

redits s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

CZ

ES

Equality

Concentration curve-General tax

credits

Family related instruments 0

.2.4

.6.8

1

Cum

mu

lative a

llow

an

ces s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

DK

DE

FR

ES

Equality

0.2

.4.6

.81

Cum

mu

lative c

redits s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

CZ

ES

IT

Equality

Concentration curves-Family tax

allowances Concentration curves-Family tax credits

Instruments targeted at vulnerable

groups

0.2

.4.6

.81

Cum

mu

lative a

llow

an

ces s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

DE

FR

ES

Equality0

.2.4

.6.8

1

Cum

mu

lative c

redits s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

CZ

FR

ES

IT

Equality

Concentration curves: VG tax

allowances Concentration curves: VG tax credits

Income related instruments 0

.2.4

.6.8

1

Cum

mu

lative a

llow

an

ces s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

FR

ES

IT

Equality

0.2

.4.6

.81

Cum

mu

lative c

redits s

ha

re

0 .2 .4 .6 .8 1Cummulative income share

CZ

FR

ES

IT

Equality

Concentration curves- IR tax

allowances

Concentration Curves: IR tax credits

CZ DE DK ES FR IT

K RE K RE K RE K RE K RE K RE

General TA 0.3258 -0.0005 -0.2203 0.0167 -0.1750 0.0022

General TC -0.0093 -0.0011 -0.0272 0.0012

Family TA 0.4013 -0.0005 -0.4960 0.0003 0.0579 -0.0023 -0.5006 0.0010

Family TC -0.2966 0.0063 -0.0437 0.0003 -0.4970 0.0082

VG-TA 0.2130 -0.0004 -0.0549 0.0004 -0.8651 0.0025

VG-TC 0.1773 0.0000 0.0241 -0.0001 0.0013 0.0000 -0.4180 0.0000

IR-TA 0.0529 -0.0019 -0.8651 0.0025 -0.1950 0.0000

IR-TC -0.8247 0.0038 -0.1139 0.0002 0.0013 0.0000 -0.3434 0.0249

Progressivity/ redistribution by type

Tax expenditure may be sizeable (~10% of gov.

revenue)

Tax allowances generally benefit middle and top more

Tax credits –larger share going to middle and top but

relatively larger at the bottom reducing inequality

Progressivity varies but generally TCs more progressive

than TAs

Some tax instruments can be strongly progressive

Ex: family TAs in DK; family TCs in IT; IR TAs in FR

Impact on inequality –generally small (exception:TC in

IT)

Summary of results (I)

The more progressive the tax schedule the stronger the

regressive effect of TAs

DE: regressive TAs likely due to the progressivity adjustment

Interaction with the wider TB system can modify impact

FR: TA reducing the income concept used to assess eligibility for

many benefits net effect much stronger than gross at the bottom

Interactions between TAs and TCs reducing one

increase another

Targeting via the tax system

Many IR/ VG instruments progressive but majority proportional

Taxpaying unit and incomes used for targeting may limit

effectiveness

Summary of results (II)

Simulation limitations:

Not all instruments simulated cross-country comparisons more

valid in the sub-types than in the aggregate

Not considering the impact of exemptions (i.e. whole categories

on income which is not taxed)

Calculations based on theoretical entitlements and liability

limited consideration of tax-evasion (IT only) and non-take-up of

tax advantages

No behavioural effects

Caveats

Thank you!

Overview of allowances &

credits

CZ DE DK ES FR IT

Social insurance contributions A A A A A

0 tax bracket / general credit C A A A

Income related A A A A A & C A &C

Expenses (incl. work) A A A & C

Child related (incl. child care) C A C A &C C

Spouse /family members C C C

Mortgage interest A A C C C

Private/ occupational pension contr. A A A A

Alimonies A A A A

Disability C C A & C

Lone parents A

Comparing to external benchmarks

0,00

1,00

2,00

3,00

4,00

5,00

6,00

7,00

8,00

9,00

CZ DE DK ES FR IT

Tax expenditure as a % of GDP

Tax allowances

OECD-tax allowances

Tax credits

OECD-Tax credits