effects of income tax on personal savings: evidence for serbia sasa randjelovic university of...
TRANSCRIPT
Effects of Income Tax on Personal Savings:
Evidence for Serbia
Sasa Randjelovic University of Belgrade
Faculty of Economics
2nd EUROMOD Workshop
Bucharest, 12 October 2012
Outline
Motivation
Theoretical framework and literature review
Income tax reform scenarios
Research design, data and methodology
Results
Concluding remarks
Motivation
Current income tax system in Serbia: Mixed (hybrid) model, with strong scheduler component Disadvantages: lack of equity (both horizontal and verical), limited
redistributive effects, complicated..Reform needed and discussed
Income tax reform – which way to take? Optimal tax theory provides different views on capital income taxation:
Zero capital income tax rate (Mankiw, et. al. (2009)) Positive rate of tax on capital income (Diamond, et. al. (2011))
The aim of the paper: To estimate the savings response to PIT reform, by taking into account all transmitting
channels (not just direct effects) Contribute to the empirical literature on PIT-personal savings relationship
Seminal research of that kind in Serbia (and CEE?)
Personal Savings Modelling: Theoretical Framework and Literature
Review Can tax policy boost personal savings? Absolute vs. permanent income hypothesis
Taylor’s model of aggregate savings:
If W*= desired wealth, W-1=existing wealth, Y=income, S=savings, r=rate of return
Literature: Barnheim (1999) – modest impact of income tax on savings Huizinga (2004) – elasticity of savings to income tax rates low Peter (2006) – permanent income-permanent consumption elasticity high
(0.9)
Tax Reform Scenarios in Serbia
Flat Tax - Scenario 1
Comprehensive IT- Scenario 2
Dual IT- Scenario 3
Taxable income
Sum of income from all sources Labor income Capital income
Tax base Gross income decreased by deductions Capital income
Personal allowance
RSD 9,000 (20% of AW) /
Dep. children allowance
RSD 4,000 (9% of AW) /
Health care expenditures
/ Full amount /
Educational expenditures
/ Up to RSD 4,000 /
Tax Rate(s) 15% 10%, 20% and 25%
10%, 15% and 20%
10%
Research Design and Basic Model Specification
PIT reform triggers change to savings via: Altering net-of tax rate of return to savings Altering net-of tax employment income
Therefore, in order to capture full effects of PIT reform on personal savings it is necessary to estimate: Elasticity of savings to the rate of return as well as to total income Change in net return to savings due to PIT reform Change in net employment income after PIT reform
Basic model (relying on Taylor’s approach):
Data and Methodology
Data: Estimation of the basic model based on monthly data
(January 2005 – December 2009, 60 observations) Estimation labor demand elasticity to wage bill also based on monthly data
(January 2004 – December 2008, 60 observations) Change in average wage being simulated by using SRMOD
SRMOD – tax & benefit microsimulation model for Serbia Living Standard Measurement Survey 2007 Sample: 5,557 households (17,375 individuals)
Step 1: Estimation of Savings Model Testing for stationarity of series:
Standard ADF and PP tests + special tests for seasonal and structural break unit root (Hegy 12, Climao 1, etc.)
Conclusion: all series d=1
Checking for direction of causality (IR-DEP) VAR(3) model esimated, based on which Granger causality test has been run Conclusions: Change in IR Granger causes change in DEP (p=0,000), not
opposite
Estimating the basic model: Engel-Granger cointegration method
ADF and PP tests confirm stationarity of residuals
IR-DEP elasticity 0.88 within range for group of countries
(0.2-4.5, Pieter (2006))
dMERBWRIPED tttt 41.0ˆlog18.0ˆ002.0ˆlog88.051.8ˆlog
Step 2: Estimating Effects of Change in Capital Income Tax Rate on HH
Bank Depostis
Estimations based on assumption of even tax incidence (between deponents and the bank) …if this assumption is changed, the effects also change
Flat tax CIT DIT
Average before tax interest rate 4.58% 4.58% 4.58%
Interest income tax rate 15% 20% 10%
Average after tax interest rate 4.24% 4.12% 4.35%
Change to the interest rate -2.63% -5.26% -
Elasticity of bank deposits to interest rate 0.88 0.88 0.88
Long run change in the level of bank deposits -2.3% -4.6% -
Step 2: Estimating Effects of Change in Capital Income Tax Rate on HH
Bank DepositsEstimated changes to the level of bank deposits in Serbia, depending on the percentage of tax burden born by deponents
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Flat tax Comprehensive income tax
Step 3: Estimating Effects of Change in Labor Income Taxes on Savings
Each scenarios of PIT reform changes the average labor tax wedge
By means of SRMOD, it has been esimtated that average labor tax wedge would decline by 2.01% in case of flat tax, by 2.27% in case of dual income tax and by 2.48% in case of introduction of comprehensive income tax
Due to high unemployment in Serbia (>25%), effective limitation is on demand side of labor market. Therefore, it is necessary to estimate labor demand response to change in labor tax wedge, in
order to estimate the change in labor income due to PIT reform
Step 3: Estimating Effects of Change in Labor Income Taxes on Savings
Labor demand modelling – macroeconomic approach Main drivers: output and labor costs (Lewis (2002), Carne (2007))
Labor demand model specification:
VAC= vacancies reported to NEB, TW=tax wedge (proxy for wage), GDP=real GDP
Unit root tests – all series d=1, so E-G cointegration approach
ADF and PP tests: residuals are stationary
ittt GDPTWVAC logloglog 210
ttt PDGWTCAV ˆlog86.0ˆlog38.017.4ˆlog
Step 3: Estimating Effects of Change in Labor Income Taxes on Savings
Error-correction model applied in order to estimate short-run relationship:
Dependent variable Explanatory variables
Estimates -0.99*** -0.35** 1.18***
t-statistics -7.14 -2.35 -3.65
p-value 0.000 0.022 0.001
Other statistical properties
Step 3: Estimating Effects of Change in Labor Income Taxes on Savings
Estimating long run effects of PIT reform on labor demand
Assuming that increased labor demand would trigger corresponding increase in employment, it is expected that the these PIT reform scenarios would imply the increase in wage bill in the respective amounts
Flat tax CIT DIT
Average change in labor tax wedge -2.01% -2.27% -2.48%
Labor demand – tax wedge elasticity -0.38 -0.38 -0.38
Average change in labor demand/wage bill 0.76% 0.86% 0.94%
Elasticity of bank deposits to wage bill 0.2 0.2 0.2
Average change in bank deposits due to change in wage bill
0.15% 0.17% 0.20%
Step 4: Estimating Total Effects of PIT Reform on Savings
When taking into account both transmission channels, the results are as follows:
The direct effects of change in capital income tax rate prevail over indirect effects stemming from change in labor tax wedge
Estimated change in bank deposits… Flat tax CIT DIT
…due to change in after tax interest rate -2.30% -4.60% 0%
…due to change in wage bill 0.15% 0.17% 0.20%
Total -2.15% -4.43% 0.20%
Concluding Remarks
Contribution of the paper: Prividing empirical estimate of impact of PIT on HH savings, by taking into account
both transmitting channels (net of tax rate of return and wage bill) Among the seminal empirical studies taking this approach (particularly for transition
economies)?
Results: Direct effects (of capital income tax) prevail over indirect effects (related to labor income
tax) Flat tax or comprehensive income tax would lead to decline in HH savings in Serbia
(by 2.15% and 4.43% respecitvely), while in case of dual income tax the savings would rise (by 0.2%)
The results are dependent on tax incidence and parametrization, which is why the main aim of the paper was to develop framework for empirical analysis, rather than to provide definite answer on the layout of future PIT scheme in Serbia
Thank you for the attention!
Questions or comments?