EUROMOD: the tax-benefit microsimulation model for the European

Union

Holly SutherlandISER, University of Essex, UK

2009 Annual Conference of the Association of Public Policy Analysis and Management

Pre-Conference Workshop  •  An International Policy ExchangeEuropean Measures of Income, Poverty, and Social Exclusion: Recent Developments and Lessons for

U.S. Poverty Measurement

Washington DC 4th November 2009

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Overview

• What is EUROMOD?

• How does it relate to the EU Social Inclusion strategy?

• What can EUROMOD do?

• Academic use of EUROMOD

• What else can be done? Future plans for EUROMOD

• How to find out more

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What is EUROMOD?

• A multi-country tax-benefit microsimulation model for the EU: unique

• It simulates tax liabilities and welfare benefit entitlements using micro-data on household from survey micro-data (c.f. NBER’s TAXSIM; Urban Institute’s models)– Distributional, budgetary, incentive effects

– First round effects; linkage to behavioural/macro models

• Highly structured, flexible and transparent

• A network of national experts in each country + core team of developers (researchers)

• Widening network of users: free for academic and non-commercial use

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How does EUROMOD relate to the EU Social Inclusion strategy?

• No formal relationship - but EUROMOD analysis can feed into the OMC at every level

• EUROMOD updating and enlargement to cover EU27 is currently being funded by the EC DG-Employment, Social Affairs and Equal Opportunities

• EUROMOD contributes analysis to projects commissioned by EC policy DGs (e.g. Social Situation Observatory)

• National analysis using EUROMOD may feed into National Action Plans

• Academic policy-relevant research

• It provides a common framework for improving policy understanding and policy learning across countries

• Also relevant for other related EU-level policy agendas (employment, “quality” public finance) and therefore for making links between them.

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Using EUROMOD for cross-national analysis: what does it do? (1/2)

1. Provides variables that do not exist in available micro-data

• Imputation e.g. net and gross incomes (and taxes)

• Customised responses to “what if…?” questions (counterfactuals)– Modelling individual choice: budget constraints (=incomes under a

range of conditions) e.g. labour supply responses

– Effects of policies on aggregate outcomes e.g.• Particular reforms (e.g. What is the effect on child poverty if child benefit

is doubled?)

• Policy learning across countries: “policy swapping”

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Using EUROMOD for cross-national analysis: what does it do? (2/2)

• Specific aspects of taxes or benefits as explanatory variables e.g.– entitlement to benefits, rather than receipt

– means-tested vs. contributory benefits

• Current or prospective policies rather than those from the past

2. Comparability across countries

• Huge range of options to maximise flexibility

• Defining variables that improve comparisons e.g.– net social benefits

– child contingent payments

– indicators of work incentives

• Examples for 19 countries; various years 2001-5.

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Composition of household disposable income whole population

Source: EUROMOD

-80

-60

-40

-20

0

20

40

60

80

100

120

140

160

180

200

BE DK DE EE EL ES FR IE IT LU HU NL AT PL PT SI FI SE UK

% o

f d

isp

os

ab

le in

co

me

market income personal taxes

social insurance contributions public pensionsmeans-tested benefits non means-tested benefits

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Composition of household disposable income bottom decile group

Source: EUROMOD

-60

-40

-20

0

20

40

60

80

100

120

140

160

180

200

BE DK DE EE EL ES FR IE IT LU HU NL AT PL PT SI FI SE UK

% o

f d

isp

os

ab

le in

co

me

market income personal taxes

social insurance contributions public pensionsmeans-tested benefits non means-tested benefits

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Child contingent payments per child by decile group % of national per capita disposable income

UK

1 2 3 4 5 6 7 8 9 10-5%

0%

5%

10%

15%

20%

25%

PT

1 2 3 4 5 6 7 8 9 10-5%

0%

5%

10%

15%

20%

25%

SI

-5%

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 8 9 10

HU

-5%

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 8 9 10

BE

-5%

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 8 9 10

AT

-5%

0%

5%

10%

15%

20%

1 1

Child

contingent

benefits

Other taxes

DK

1 2 3 4 5 6 7 8 9 10

NL

1 2 3 4 5 6 7 8 9 10

FI

1 2 3 4 5 6 7 8 9 10

DE

1 2 3 4 5 6 7 8 9 10

AT

1 2 3 4 5 6 7 8 9 10

SE

1 2 3 4 5 6 7 8 9 10

EE

1 2 3 4 5 6 7 8 9 10

PL

1 2 3 4 5 6 7 8 9 10

EL

1 2 3 4 5 6 7 8 9 10-5%

0%

5%

10%

15%

20%

25%

LU

1 2 3 4 5 6 7 8 9 10-5%

0%

5%

10%

15%

20%

25%ES

-5%

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 8 9 10

FR

1 2 3 4 5 6 7 8 9 10

IE

1 2 3 4 5 6 7 8 9 10

IT

1 2 3 4 5 6 7 8 9 10

Source: EUROMOD

Child contingent benefits

Child contingent taxes

Total net payments

Share of children

Source: EUROMOD

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Incentives to work (METRs)

Average marginal effective tax rates (METRs) faced by working population

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

GR SP EE PT IR LU UK PL IT NL AT FR HU SW FI SI GE DK BE

Mean MedianSource: EUROMOD

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Academic use of EUROMOD

• Examples – F. Figari, H. Immervoll, H. Levy, H. Sutherland, Inequalities within couples

in Europe: market incomes and the role of taxes and benefits, Eastern Economic Journal, forthcoming.

– A. Paulus, A. Peichl, Effects of flat tax reforms in Western Europe, Journal of Policy Modeling, 2009.

– O. Bargain, T. Callan, Analysing the effects of tax-benefit reforms on income distribution: a decomposition approach Journal of Economic Inequality, 2008.

– H. Immervoll, H.J. Kleven, C.T. Kreiner, E. Saez, Welfare Reform in Europe: A Micro-simulation Analysis, Economic Journal, 2007.

– H. Levy, C. Lietz, H. Sutherland, Swapping Policies: Alternative Tax-Benefit Strategies to Support Children in Austria, Spain and the UK, Journal of Social Policy 2007.

• Building a user community – Working Papers, “Recipes”, work-in-progress conferences

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Future plans for EUROMOD: what else can be done?

• A new version of EUROMOD– enlarge from 19 to 27 countries

– regular updating of policy rules

– Eurostat EU-SILC database (regularly updated)

– 3-year project 2009-12

• And…?– indirect taxes

– non-cash incomes

– childcare policies

• General framework can be used to shortcut the process of building comparable models for any country (e.g. SAMOD for South Africa)

• Towards WORLDmod?

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Further information on EUROMOD

Web site: http://www.iser.essex.ac.uk/research/euromod– Country Reports

– Recipes and user documentation

– Working Papers

– Courses

– Projects

– Statistics

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Challenges

• Non take-up of benefits and tax evasion• Data issues • Management and updating