Holly Sutherland, ISER University of Essex 3rd ESRC Research Methods Festival, Oxford 30 June 3 July

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Holly Sutherland, ISER University of Essex
3rd ESRC Research Methods Festival, Oxford 30
June 3 July 2008Session 45
Using microsimulation to understand the effects
of social and fiscal policies in cross-national
context
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Overview

• Explaining how EUROMOD, a multi-country (EU)
  tax-benefit model, produces comparable measures
  across countries (data for analysis and
  interpretation)
• Illustrated with some measures relevant to gender
  questions
• based on some (long-term) work in progress,
• encompassing contributions to GeNet (project 5
  Within household inequalities and public policy)
• An example of infrastructure development in the
  context of a research programme
• research questions informing the technical
  capacity of the infrastructure
• infrastructure prompting refinements to research
  questions
• Not so much methods as tools and issues of
  measurement and interpretation

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Microsimulation models

• Microsimulation models provide data for analysis
• Tax-benefit models simulate cash benefit
  entitlements and personal tax liabilities, using
  micro-data on households from sources that are
  representative of the population and
  re-calculating income under alternative scenarios
• Consistent results for income-related indicators,
  including
• budgetary effects
• income distributions (poverty and inequality
  indicators)
• redistributive effects
• gainers and losers
• indicators of work incentives (RRs METRs)
• EUROMOD consistent results across countries
• Comparative analysis of the effects of policies
  and policy reforms
• EU-level outputs
• Policy learning across countries policy
  swapping - Understanding the effects of
  tax-benefit systems on different populations

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Using EUROMOD

• EUROMOD is a multi-country tax-benefit
  microsimulation model unique
• It was built because of difficulties in making
  national model calculations comparable, funded by
  a series of European Commission projects
  (1998-2008)
• Consortium of teams from each country including
  universities, research institutes, government
  research and policy orientated (a rich mix)
• Currently 19 EU countries EE, PL, HU, SI EU15

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The EUROMOD approach

• Comparability through flexibility (parameterise
  everything in a structured way)
• monetary policy elements, tax rates etc units of
  assessment
• interaction of policy elements eligibility
  conditions
• income definitions
• A common framework for doing equivalent things
  across countries
• a unified design
• common structure and building blocks (language)
• disciplined input data specification
• Complexity requiring
• good documentation including validation
• training and support for users
• specialist developers
• Involvement of national teams in model
  construction, development and collaborative
  research applications
• Creating a user community EUROMOD is currently
  free for academic use (subject to access
  conditions attached to underlying data)
• The common framework is now being used in South
  Africa and for LATINMOD (5 Latin American
  countries)

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Example1 The effect of taxes and benefits on
the income of older people

• (Joint work with Francesco Figari and Manos
  Matsaganis for DG-EMPLs European Observatory on
  Social Situation and Demography)
• Question addressed The role of pensions in the
  income of the elderly populations of the EU
• minimum pensions, private pensions
• by level of household income, age and gender
• Conceptual and methodological issues defining
  and identifying minimum pensions

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Defining and identifying minimum and private
pensions

• Minimum pensions instruments categorised as
  minimum income provision for older people in the
  2006 SPC study
• Universal basic pensions
• Social pensions
• Social assistance
• Means-tested supplements
• Integrated minimum pensions
• Only some of these can be identified empirically
  using survey data and/or microsimulation
• Private pensions here include occupational
  defined benefit pensions that may replace (rather
  than complement) state contributory pensions
• Information is only as good as the underlying data

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Income sources per person aged 65by quintile
group of household disposable income(normalised
of national per capita disposable income)
RH axis shows share of people 65 per quintile
group
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Income sources per person aged 65by quintile
group of household disposable income(normalised
of national per capita disposable income)
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Income sources per elderly person (male 65) as a
of per capita disposable income by quintile
group
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Income sources per elderly person (female 65) as
a of per capita disposable income by quintile
group
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What have we seen? Discussion

• Comparability
• What is a minimum pension and a private pension?
• given the definition, EUROMOD can in principle
  capture it
• BUT some pension elements cannot be identified
  (data) and many others cannot be simulated (data)
• Are the (household) 65 populations comparable?
• differential rates of entry into residential care
  across countries
• ditto retirement abroad
• Questions about gender
• Treatment of derived rights and inherited
  pensions
• Within (and between) household sharing
  assumptions and reality

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Example2 Couples, gender inequalities in income,
and tax-benefit systems

• Based on ongoing joint work with Francesco
  Figari, Herwig Immervoll and Horacio Levy
• Given gender inequalities in market incomes
  within couples what do tax-benefit systems
  achieve in reducing these inequalities?
• or put another way
• If couples share their financial resources, how
  much of the implicit transfer is done for them by
  governments?
• To what extent is the within-couple
  income-equalising function accompanied by a
  reduction in equal opportunities for members of
  the couple, as expressed by differential
  incentives to work?

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(1) Equalising analysis

• An accounting exercise, dividing household income
  into individual shares
• Couples (m/f bothlt65) living in the same
  household excluding cases where other adults are
  present
• The relative effects in comparative perspective
  9 EU countries (AT, FR, DE, NL, UK, FI, EL, PT,
  IT) and systems (2001).
• Disposable incomes market income cash
  benefits income tax - employee/self employed
  social contributions at the household level this
  is used for the analysis of poverty, inequality,
  redistribution etc.
• Incomes allocated between couple partners
• market incomes, individual benefits to
  individual
• family or household benefits and those for
  children shared equally
• joint taxes split in proportion to taxable income
  
• individual taxes and contributions allocated to
  individual
• Gender inequality expressed as the womans share
  in the couple total Equalisation is the
  increase in the female share measured due to the
  tax-benefit systems

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Womens share of couple income and the equalising
effect of tax-benefit systems
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Proportional reduction in the gap between male
and female incomes due to taxes and benefits
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What have we seen? Discussion

• Comparability
• Selection effects into couples of interest?
• Disaggregate but how?
• Questions about gender
• Alternative sharing/splitting assumptions
• Within household sharing assumptions and reality
  (does income matter as an outcome?)

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Work incentive questions a selection

• What is the effective tax rate (METR) on a 3
  increase in own earnings? How does this differ
  within 2-earner couples? Two measures
• change in household income (assumes income is
  shared as in the unitary model of the family)
  HMETR
• change in individual income IMETR (assumes
  individual only takes account of own income as
  defined here consistent with separate spheres
  model of couple bargaining)
• How much does each person need to increase their
  earnings in order for household disposable income
  to increase by 10?
• What proportion of earnings is taxed or withdrawn
  in benefits on entry into work for women with
  earning partners?
• ??

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Do women face lower incentives to work
intensively than their male partners?

• Women in 2-earner couples tend to have lower
  METRs than men
• The exceptions are in the joint taxation
  countries (GE, FR, PT) and only when METRs are
  calculated across all household income
• Calculating individual METRs makes little
  difference in individual tax countries (METRs are
  somewhat lower)
• In joint taxation countries IMETRs show female
  work incentives to be better than male
• Men outnumber women in facing very high HMETRs
  except in Germany which combines joint taxation
  with high tax rates. The German picture is
  reversed using IMETRs.

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What are the right questions to ask?

• Comparability
• Does the appropriate question depend on the
  extent of labour market flexibility?
• Questions about gender
• Whose income is important (work incentives)?
• Within household processes e.g. what is the
  appropriate time period over which to assume
  couples consider changes (is it the withholding
  tax system or the final income tax and end of
  year reconciliation that matters do they each
  matter the same amount to men and women)?
• This also affects comparability the right what
  if question may differ across countries

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Concluding points

• There is a two-way relationship between asking
  the right research questions and having the means
  to answer them
• I have illustrated this with reference to
  comparability across countries and
  gender-relevant analysis
• A flexible research tool like EUROMOD can
  cumulatively build on research using it, adding
  new options, while also provoking new questions