Cross-National Microsimulation using EUROMOD How does it work and what can it do? Holly Sutherland Institute for Social and Economic Research, University of Essex, UK QMSS conference June 2007, Prague, Czech Republic

2 Outline What are microsimulation models? Cross-national microsimulation and EUROMOD More about EUROMOD – Framework, design and data – Comparability across countries – What can it used for? – Some examples – Becoming a EUROMOD user – Current limitations and future plans

3 Microsimulation models “ Static” and “dynamic” microsimulation – Static “morning after” – Dynamic: long term, behavioural, both Microsimulation models provide data for analysis Tax-benefit models are “static” and deal with household income, re-calculating income components (cash benefit entitlements and personal tax liabilities) under alternative scenarios “Organised arithmetic” (lots of it…) Not so much a “method” but more of a multi-purpose “tool” that might be combined with other methods/tools

4 Tax-benefit models 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) Budget constraints (=incomes under alternative conditions) for modelling individual choices at the micro level Due to changes in – Tax and benefit policies (actual, proposed or illustrative) – Household/individual characteristics or macro conditions

5 What are the main inputs? 1.Microdata on households and individuals, from income surveys or administrative data 2.Coded policy rules 3.An interface or framework for changing the rules and assumptions, usually via parameters  Contrast with analysis of income data taken directly from a survey – more detail on components of taxes/benefits; can be more up-to-date; both net and gross income – “what if” questions – tested, consistent, documented, organised, “branded” – replicable results…multi use and multi user

6 A multi-country model for cross-national research? 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  “Borrowing” policies that seem effective in one country (e.g. UK WFTC) But policy structures are very different across countries in several dimensions: – Policy design (e.g. rates, brackets, scales, limits) – Unit of assessment (e.g. family vs. household) – Definition of personal characteristics (e.g. who counts as a child?) – Income assessments (e.g. tax base) – Interaction with other policies (e.g. taxable or not) Data sources and requirements are different too.

7 EUROMOD EUROMOD is a multi-country tax-benefit model: unique It was built because of difficulties in making national model calculations comparable, funded by a series of EC FP projects ( ) National models exist in most of the EU15 and some of the 12 NMS Typically much more flexible than national models but covering the tax- benefit systems in less detail or more selectively  National models for national analysis  EUROMOD for comparative/comparable multi-country analysis Provides national tax-ben modelling capacity in/for Austria, Luxembourg, Portugal and Greece Currently EU15 and working on 12 NMS (PL, HU, SI, EE soon); common policy years 1998, 2001, 2003 (some), various other years for selected countries

8 EUROMOD structure Code (e.g., tax schedule) Model input data (e.g., imputed gross income) Parameters (e.g., tax rates) Policy rules (e.g., income tax) Micro output (e.g., net income) Specific analysis Tools (e.g., summary statistics) Original data (e.g., ECHP, FES) Run- interface

9 EUROMOD base datasets for EU15 (June 2007)

10 Key EUROMOD data requirements A recent, representative sample of households, weighted to population level and to correct for non-response Income variables – No missing values – gross of taxes and contributions – by source of income (e.g. national benefits, not harmonised categories) – by individual recipient (unless naturally household-based e.g. housing benefit) – reference period(s) corresponding to tax-benefit assessment periods Other variables – housing costs and other expenditures affecting tax liabilities or benefit entitlements (mortgage interest, child care payments…) – other info affecting tax liabilities or benefit entitlements (hours of work, civil servant status, private pension contributions...) – individual characteristics and within-household relationships in the same period(s) as the income information

11 Database construction To date Responsibility of national teams, including choice of source of data Core common variables, plus necessary others Imputations and adjustments, including net-to-gross income imputation Updating factors to take incomes (by source) from the data year (income reference period) to the policy year (1998, 2001, 2003…) In the future EU-SILC with significant amount of common (centralised) data manipulation, done regularly. Deficiencies for this purpose of Eurostat EU-SILC are outweighed by scale economies, simplification of user access and strategic advantages.

12 Extent of parameterisation (flexibility) In national models: monetary elements, tax rates etc eligibility conditions (partly) income definitions (partly) In EUROMOD: monetary elements, tax rates etc eligibility conditions income definitions unit of assessment interaction of policy elements order of policies

13 Main menu

14 Policies

15 Comparability of results across countries Input data quality, representativeness and coverage considerations Data reference date; income reference period A common framework for doing equivalent things across countries Output income concepts (ie scope of the income calculation) can be defined by the user; defaults are offered A huge range of user options and choices “comparability through flexibility” Harmonisation of input data can be a hindrance – e.g. ECHP and SILC benefit categories Comparable outputs often require inputs that are different across countries. Involvement of national teams in model construction, development and collaborative research applications Documentation to aid interpretation of results – Country Reports (validation) A tension between quality in any one country and comparability

16 Comparability of results across countries Input data quality, representativeness and coverage considerations Data reference date; income reference period A common framework for doing equivalent things across countries Output income concepts (ie scope of the income calculation) can be defined by the user; defaults are offered A huge range of user options and choices “comparability through flexibility” Harmonisation of input data can be a hindrance – e.g. ECHP and SILC benefit categories Comparable outputs often require inputs that are different across countries. Involvement of national teams in model construction, development and collaborative research applications Documentation to aid interpretation of results – Country Reports (validation)

17 Examples of EUROMOD use Two examples from my own work – Measuring child-contingent incomes from taxes and benefits – A policy swap EUROMOD WPs illustrate other types of model use –

18 Spending on child contingent net transfers and tax concessions Per child spending as a % of per-capita hhold disposable income 2001 EUROMOD Working Paper EM4/04

19 The distributional effect of a budget-neutral UK 2003 system of child- targeted cash support Shares of spending and shares of children by decile group of household income Austria EUROMOD Working Paper EM10/05

20 Examples of EUROMOD use EM3/02 P Feres, H Immervoll, C Lietz, H Levy, D Mantovani and H Sutherland: Indicators for Social Inclusion in the European Union: how responsive are they to macro-level changes? EM3/03 H Immervoll and C O'Donoghue: Employment Transitions in 13 European Countries. Levels, Distributions and Determining Factors of Net Replacement Rates EM1/04 H Immervoll, H Jacobsen Kleven, C Thustrup Kreiner, E Saez: Welfare Reform in European Countries: A Micro-Simulation Analysis EM5/05 D Mantovani, F Papadopoulos, H Sutherland and P Tsakloglou: Pension Incomes in the European Union: Policy Reform Strategies in Comparative Perspective EM2/06 O Bargain and K Orsini: Beans for Breakfast? How Exportable is the British Workfare model? EM4/06 H Levy, C Lietz and H Sutherland: A Basic Income for Europe's Children? EM2/07 M Matsaganis and M Flevotomou: The impact of mortgage tax relief in the Netherlands, Sweden, Finland, Italy and Greece

21 Becoming a EUROMOD user Training and support – Essex Summer School course – Other courses? – ECASS visits to Essex (for non UK-based people) The model itself, documentation etc can be downloaded free Data access is an issue Have a good idea of what you want to use it for Get in touch.

22 Current limitations and future plans Age of underlying data in some countries * Direct taxes and cash benefits only; no indirect taxes or non-cash benefits * Most contributory benefits are not fully simulated * Static calculations only * Benefit take up is assumed to be 100%; no tax evasion* Tax benefit systems for 1998, 2001, 2003 (some)* EU15 only; 4 NMS being incorporated (EE, PL, HU, SI) * Permission to access some datasets is restricted * * work is underway or planned to remedy these limitations….

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