manos matsaganis & panos tsakloglou athens university of economics fbbva microsimulation...

Manos Matsaganis & Panos TsakloglouAthens University of Economics

FBBVA Microsimulation WorkshopMadrid 15-16 November 2004

Microsimulation and the analysis of poverty and inequality

an illustration

Microsimulation, poverty and inequality (1)

MS can help analyse the effect of policy changes

examine redistributive impact of current policies

explore impact of reforms vs. some baseline

answer counterfactual («what if»-type) questions


MS can help produce various types of output

analyse the impact of policy changes in terms of:

changes in the income distributionpoverty and inequality

distribution of gains and losses i.e. winners and losers in the entire population ... ... or by population group (lone parents, elderly etc.)

fiscal implications of policy changesexcl. administrative costs


MS can help calculate RRs and METRs

replacement ratesdoes work pay?

marginal effective tax ratespoverty trap?

unemployment trap?


MS can help disentangle separate effects

taxes and benefits interact

e.g. raising benefit rates will raise pre-tax incomes, so it may move recipients to a higher tax band ...

... while lowering taxes will raise pre-tax incomes, so it may cause recipients of income-tested benefits to lose eligibility

no other way to account (separately and jointly) for the effect of taxes and benefits on final disposable incomes

An illustration

Matsaganis M., O’Donoghue C., Levy H., Coromaldi M., Mercader-Prats M., Rodrigues C.F., Toso S., Tsakloglou P.

«Child poverty and family transfers in southern Europe»

Working Paper EM 2/04

Microsimulation Unit, University of Cambridge

http://www.econ.cam.ac.uk/dae/mu/emod.htm

1. Introduction

2. Data and methodology

3. Incidence of child poverty by household type

4. Distributional impact of family transfers

5. Simulating reforms

6. Discussion and policy implications

The paper

aims to assess the impact – of family transfers

– on child poverty

– in southern Europe

• Greece

• Italy

• Spain

• Portugal

using microsimulation

– the tax-benefit model EUROMOD

Family transfers

definition all income transfers to families with children

child benefits (non-contributory)

family allowances (contributory)

tax relief for dependent children

non-cash benefits (e.g. child care) not included

Child poverty

issue has risen to prominence

– poor children by definition “deserving”

– social costs of child poverty vs. benefits of early intervention

anti-poverty measures human capital investments high future returns!

political commitments

– Blair pledge to eliminate child poverty in Britain by 2020

– Commission proposal to halve child poverty in the EU by 2010 (not endorsed by the Council)

Southern Europe

tradition of “familialism”

strength of informal safety nets but are family resources adequate for intra-family redistribution?

subsidiary role of formal safety nets public assistance to families meagre / not available at all reliance of tax benefits what about those too poor to pay tax?

uneven coverage gaps in protection

1. Introduction






EUROMOD (1)

what is it? – a tax-benefit model for all 15 “old” EU members

construction funded by EC TSER / FP5 programmes 40 persons in 18 centres led by Cambridge University main objective: comparability

what can it do?– analyse policy changes in a comparative setting

examine impact of current policies explore impact of reforms answer “what if?”-type questions

EUROMOD (2)

what data does it rely upon? EC Household Panel (Greece / Spain / Portugal) Bank of Italy Survey of Household Income & Wealth

updated to 19982001 dataset in progress

what sort of policies does it simulate? income taxes, social contributions social assistance, housing, family, unemployment and

some social insurance benefits, e.g. social pensions1998 & 2001 rules applied2003 update in progress

EUROMOD (3)

what types of output does it produce?

– estimates of policy impact in terms of: income distribution

fiscal costs

distribution of gains and losses (winners and losers)

– calculations of: marginal effective tax rates

replacement rates

EUROMOD (4)

temporary difficulties?

– no simulation of benefits in kind (publicly provided services)

– full tax compliance (no tax evasion)

– no targeting errors (100% take up / no leakage)

given sufficient effort (and funding), all of the above may be fully or partly amenable to treatment

EUROMOD (5)

structural weaknesses?

static microsimulationno behavioural responses

e.g. labour supply

consumer demand etc.

nonetheless:

dynamic models sensitive to assumptions

in the short term, static MS may be sufficient

1. Introduction






Table 2a Child poverty rates

Greece Italy Spain Portugal

couple with 1 child 0-17 10.0 13.0 12.5 11.3

couple with 2 children 0-17 14.9 20.7 15.6 16.1

couple with 3+ children 0-17 12.0 37.0 33.8 35.7

lone parent: all children 0-17 42.2 49.0 45.2 56.6

lone parent: 1+ child 18+ 30.0 67.7 41.6 34.4

couple with 1+ child 18+ 18.3 36.0 30.2 21.2

other hh types with children 28.5 27.6 19.5 27.4

all households with children 17.0 26.5 21.6 23.1

all households 20.5 20.7 18.3 22.0

Table 2b Contribution to aggregate child poverty










1. Introduction






Table 7a Estimated value of cash benefits

family size income Greece Italy Spain Portugal

1 child

low 88 250 36 191

middle 71 267 16 188

high 114 41 5 185

2 children

low 76 640 124 233

middle 72 390 9 202

high 131 29 2 182

3 children

low 319 569 165 227

middle 313 664 24 225

high 172 93 0 217

4+ children

low 327 177 203 254

middle 457 895 95 308

high 275 47 36 249

Table 7b Estimated value of tax relief

family size income Greece Italy Spain Portugal

1 child

low 67 188 114 80

middle 68 202 138 87

high 84 203 126 89

2 children

low 27 120 60 49

middle 71 165 158 86

high 79 159 176 96

3 children

low 11 85 42 38

middle 83 147 185 76

high 108 161 210 85

4+ children

low 47 71 0 24

middle 88 129 113 24

high 132 163 210 80

Graph 1 Concentration curves

Greece

0

20

40

60

80

100

0 20 40 60 80 100

Cumulative population share(by equivalent income)

Sh

are

cash benefits

tax relief

all family transfers

disposable income (net of familytransfers)line of perfectequality

I taly

0

20

40

60

80

100

0 20 40 60 80 100

Cumulative population share (by equivalent income)

Sh

are

cash benefits

tax relief



Portugal

0

20

40

60

80

100

0 20 40 60 80 100


Sh

are

cash benefits

tax relief


disposable income (net of familytransfers)

line of perfectequality

Spain

0

20

40

60

80

100

0 20 40 60 80 100


Share

cash benefits

tax relief



Table 11a Impact on child poverty rates










Percentage reduction in the number of poor children due to current policies

Table 11b Impact on child poverty gaps










Percentage reduction in the aggregate child income gap due to current policies

Table 12 Redistributive impact of family transfers


child poverty rate

before any family transfers 18.5 32.7 23.4 29.2

after tax relief 18.2 31.9 22.2 28.6

after cash benefits 17.4 27.7 23.2 23.7

after all family transfers 17.0 26.5 21.6 23.1

FGT index ( = 2)

before any family transfers 3.8 6.5 4.3 2.5

after tax relief 3.7 6.2 4.3 2.4

after cash benefits 3.3 4.7 3.8 1.4

after all family transfers 3.3 4.5 3.7 1.4

The FGT index attaches greater weight to larger income gaps

Figure 1 Target efficiency of social transfers

A

CB

D

post-transfer disposable income

pre-transfer disposable income

households ranked by income

PREA / A+B+C

PGEA / A+D

poverty line

Table 13 Target efficiency of family transfers

PRE PGE

= 1 = 2 = 3

GREECE - cash benefits 21.1 4.7 7.3 10.2

GREECE - tax relief 8.2 1.0 1.0 1.1

ITALY - cash benefits 55.2 15.2 18.1 18.8

ITALY - tax relief 26.2 4.5 4.7 4.5

SPAIN - cash benefits 80.5 4.9 8.4 11.1

SPAIN - tax relief 12.3 1.6 0.7 0.3

PORTUGAL - cash benefits 38.7 20.7 31.5 39.6

PORTUGAL - tax relief 13.6 2.6 2.9 3.4

Greater values of indicate greater concern for those with larger income gaps

1. Introduction






Reforms (1)

reforming family transfers

abolish all current policies

introduce universal child benefits

what if ...?

Reforms (2)

why universal child benefits?

obvious solution to the problem of gaps in coverage ... though controversial

good for illustrationeasy to explainsimple to implement

Reforms (3)

which universal child benefits?

various issues involvedbenefit level

variation by age

variation by no. of children etc.

5 variations of UCB reform

2 “artificial” universal child benefits

poverty-neutral / budget-neutral

3 “actually existing” universal child benefits

British / Danish / Swedish schemes ...

... adjusted in terms of average male f-t earnings

Table 14 Simulated reforms


Reform I: poverty neutral UCB 204 912 196 350

Reform II: budget neutral UCB 197 582 135 284

Reform III: British CB eldest 401 676 555 369

other children 326 551 452 300

Reform IV: Danish CB 0-3 yrs 594 1 003 824 547

4-7 yrs 540 912 749 498

8-17 yrs 422 711 584 388

Reform V: Swedish CB 1st-2nd 354 597 490 326

3rd 448 756 621 413

4th 637 1 074 883 586

5th+ 707 1 194 981 651

annual earnings male f-t employee 10 253 17 300 14 212 9 441

Table 15a Impact of simulated reforms(I): child poverty rates


child poverty rate

baseline: current policy 17.0 26.5 21.6 23.1

Reform I poverty neutral UCB 17.0 26.5 21.9 23.1

Reform II budget neutral UCB 17.1 28.4 22.5 25.4

Reform III British CB 16.0 28.1 18.9 23.5

Reform IV Danish CB 15.5 27.1 17.9 19.6

Reform V Swedish CB 15.9 28.1 18.9 23.2

Table 15b Impact of simulated reforms(II): intensity of child poverty


FGT index (α=2)







Table 17 Winners vs. losersreform II (budget neutral CB)

Greece

0

10

2030

40

50

1 2 3 4 5 6 7 8 9 10

income decile

perc

ent

winners

losers

I taly

0

20

40

60

80

1 2 3 4 5 6 7 8 9 10

income decile

perc

ent

winners

losers

Spain

0

20

40

60

80

1 2 3 4 5 6 7 8 9 10

income decile

perc

ent

winners

losers

Portugal

0102030405060

1 2 3 4 5 6 7 8 9 10

income decile

perc

ent

winners

losers

Table 19 Winners vs. losersreform IV (Danish UCB)

Spain

010203040506070

1 2 3 4 5 6 7 8 9 10

income decile

per

cent

winners

losers

Greece

0102030405060

1 2 3 4 5 6 7 8 9 10

income decile

perc

en

t

winners

losers

Portugal

0

20

40

60

80

1 2 3 4 5 6 7 8 9 10

income decile

per

cent

winners

losers

Italy

0102030405060

1 2 3 4 5 6 7 8 9 10

income decile

perc

en

t

winners

losers

Table 21 Fiscal effects of simulated reforms


child poverty rate







1. Introduction






Concluding remarks (1)

performance of family transfers modest

many poor families are ineligible for assistance (GR / IT)

... or receive low benefits (SP / PT)

non-refundable tax credits exclude poor families by design


performance of UCBs disappointing?

replacing current policies by UCBs would not reduce the number of poor children by much – and could even increase it!

impact of UCBs weak or negative where current policies provide substantial benefits to a considerable subset of the low-income population (as in Italy)


headcount poverty too severe a test for UCBs

where existing policies leave coverage gaps, those currently ineligible for assistance will be better off under a UCB even when they remain below the poverty line

headcount poverty rates cannot capture such improvements

bringing in the FGT index (implying more concern for those at the bottom of the income distribution) does more justice to the anti-poverty impact of UCBs


not all UCBs are the same

the Danish UCB, paying higher amounts to younger children, emerges ahead of the others in terms of generosity and anti-poverty effectiveness

The British and the Swedish UCBs, though different in structure (the former paying a higher rate to the eldest child, the latter rising in value with family size) have similar effects on child poverty and fiscal costs


playing field uneven

100% take up a reasonable assumption for universal benefits – not so for currrent income-tested policies

in favour of universal child benefits low administrative costsno stigmano adverse labour incentives (i.e. no poverty traps)


the case for UCB wider

horizontal redistributionfrom single tax payers to families with childrenchildren a (partly) public good

social citizenshipaccess to certain benefits can be a citizen right

political economy considerationsnarrowly targeted programmes at risk of backlashsupport for universal programmes broader-based


a basic trade off at work

more generous UCBs are more effective but costlier

but: current spending on family transfers far too low

hard to reduce poverty via internal reallocations alone


way forward?

judiciously combine

a universal (even if low) income base ... to address the problem of gaps in coverage

to achieve horizontal redistribution

... with more targeted (non-categorical) interventions to direct extra resources to families in need

to improve effectiveness of both type I and II


bring in services ...

there is more to fighting child poverty than cash benefits alone

universal access to affordable, good-quality family services a high priority

a child care guarantee a promising route out of poverty


... but avoid the other extreme

services a complement of cash benefits, not a substitute

proper design of income transfers still relevant!


the role of microsimulation: counterfactual

“what if”-type questions

involve interactions between benefits and taxes ...

... that are difficult to predict

only tax-benefit modelscan provide full answers to counterfactual questions

in spite of their limitations!


the role of microsimulation: aid to policy making

a valuable tool to decision making

“informing” policy dilemmas

promoting a more rational and dispassionate debate on tax-benefit reform

manos matsaganis & panos tsakloglou athens university of economics fbbva microsimulation...

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