Microsimulation @CBR Michal Horváth, Zuzana Siebertová Meeting of the Network of EU IFIs Workshop on Microsimulation Rome, 4th May, 2018

Part I Introduction

Background Evaluating realistic policy measures requires a tool that Captures national policy environment in fine detail Is based on good quality and well-adjusted micro data Generates outcomes that provide a good match with administrative data on aggregate ceteris paribus Takes a broader perspective (feedback effects) The CBR microsimulation tool aims for an improvement relative to previously used methods on all these fronts

Simulation model at a glance w_hat if model (1) SIMTASK: static tax-benefit calculator (2) Labour supply model (3) Integrated into a macro model with unemployment Model allows to answer “what if” type questions Policy impact at micro level (disposable income, inequality, METR, AETR) Immediate and long-run fiscal effects Full transition from one steady state to another for macro variables

Part II OUR APPROACH

Data & SIMTASK Re-weighting of the underlying micro-data More detailed control of selected categories: income distribution & children-age cohorts Microsimulation tool SIMTASK Runs on SK-SILC Inspired by EUROMOD: tailored to country-specific conditions Involves a maximum degree of user control —> can be incorporated within other models used by Slovak CBR New approach in general improves the fit between simulated output and official statistics

SIMTASK: Slovak Tax-Transfer Microsimulation Model SIMTASK simulates for every individual and policy scenario Personal income tax Social and health security contributions paid by employers, employees and self-employed Social transfers Family related transfers: child birth grant, child benefit, parental allowance Social assistance: material need benefit Unemployment benefit Net income VAT paid by households is simulated in a separate block

SIMTASK: validation of payroll taxes LEGEND: Ratios of aggregate PIT, SIC and HIC payments simulated by SIMTASK to aggregate amounts referred by the official statistics. Perfect match is achieved if the ratio equals to 1. PIT: Personal Income Tax SIC: Social Insurance Contrib. HIC: Health Insurance Contrib.

SIMTASK: validation of social transfers (amounts) LEGEND: Ratios of aggregate amounts of transfers simulated by SIMTASK to aggregate amounts referred by the official statistics. Perfect match is achieved if the ratio equals to 1.

Model of labour supply Extensive margin response Method to assess how the tax-benefit system affects motivation to work Participation decision of individuals on the labour market is examined by comparing two states Being economically active Being inactive Probit model for economic activity Estimated as a pooled regression 2012-15 separately for males and females Most responsive groups were found females and low-educated

Labour supply model (contd.) Intensive margin response Change in hours worked … can be expressed as a function of net-of-tax rates marginal and average elasticities Response calibrated based on estimations for Hungary (Kiss and Mosberger, 2015) … marginal net-of-tax rate elasticity 0.2 for top 20% earners

Macro model A model with unemployment Dynamic general equilibrium model with matching frictions Equilibrium wage determination Labour demand from firms’ profit maximisation Theoretical bargaining replaced by an aggregate schedule (w, L) Interaction with the micro part Aggregate labour supply schedule is based on individual decisions coming from empirical decision functions Combines empirical work with calibration A number of macro model parameters calibrated in line with external data and literature

How does w_hat if work? “Baseline” and “scenario” evaluation Compute net wages (observed/predicted for employed/unemployed) and transfers (if employed/inactive) using SIMTASK Evaluate probability of being economically active, being employed and effective hours worked using elasticities Aggregation Aggregate up individual adjustments at extensive and intensive margins This is done for different simultaneous wage shocks The result is an aggregate labour supply schedule Macro model solution Use standard methods to solve dynamic general equilibrium models Final steady state solution equivalent to a popular iterative approach

EXAMPLES OF MODEL OUTPUTS Part III EXAMPLES OF MODEL OUTPUTS

Effective tax rates Cuts in family transfers One tax rate 22% Average Marginal

Distributional effects Cuts in family transfers One tax rate 22% Disp. income household Probability of economic activity (individual)

An aggregate labour supply schedule

Macro IRFs

Fiscal effects One tax rate 22 % Fiscal effect Fiscal revenue   SIC and HIC paid by Fiscal exp Inequality PIT employ- ees employ- ers self- empl VAT CIT GINI Kakwani baseline, 2018 (in mil. euros) 9 284 17 851 2 414 2 616 6 922 1 108 3 115 1676 8 567 27.4 6.4 Short-run 4.11 2.14 16.8 0.0 -0.7 -0.35 0.61 Behavioural effects 3.55 1.85 16.2 -0.3 -0.2 -0.9 -0.41 0.68 Long-run 3.63 1.89 16.5 -0.1 -0.8 -1.1 0.01 -0.4 0.67 Reduction of family related transfers and credits   Fiscal effect Fiscal revenue SIC and HIC paid by Fiscal exp Inequality PIT employ- ees employ- ers self- empl VAT CIT GINI Kakwani baseline, 2018 (in mil. euros) 9 284 17 851 2 414 2 616 6 922 1 108 3 115 1676 8 567 27.4 6.4 Short-run 1.52 0.24 2.1 0.0 0.1 -0.3 -1.2 -0.2 0.16 Behavioural effects 1.51 0.23 -0.01 -0.21 0.15 Long-run 1.48 0.21 2.0 -0.1 0.03 0.2 Notes: First row (baseline) represents direct output from the simulation model; monetary variables in mil. euros. Subsequent rows display changes in % from baseline values. In case of inequality measures the numbers express changes in percentage points. SIC - social insurance contributions, HIC - health insurance contributions, PIT - personal income tax, VAT - value added tax, CIT - corporate income tax. CIT is computed directly using the effective tax rate.

Making the tool accessible Part IV Making the tool accessible

An online tool SIMTASK on web on-line version of the simulation model tool to assess immediate fiscal and distributional effects of reforms, impact on inequality targeted to public: analysts, journalists, students available at http://simtask.rozpoctovarada.sk

Thank you for your attention