Cross-National Microsimulation using EUROMOD How does it work and what can it do?

1. Cross-National Microsimulation using EUROMODHow does it work and what can it do? Holly Sutherland Institute for Social and Economic Research, University of Essex, UK 3rd ESRC Research Methods Festival, Oxford 30 June – 3 July 2008 Session 38

2. Abstract and outline • EUROMOD is a tax-benefit microsimulation model for the EU. It is used to answer "what if" questions about the effects of fiscal and social policies, and policy reforms, on household incomes. Thus it provides "data" for analysis according to the user's own specification and question of interest. See http://www.iser.essex.ac.uk/msu/emod/ • What are microsimulation models? • Cross-national microsimulation and EUROMOD • More about EUROMOD • Framework, design and data • Comparability across countries • Becoming a EUROMOD user

3. Microsimulation models • 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…) • 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

4. What are the main inputs? • Microdata on households and individuals, from income surveys or administrative data • Coded policy rules • 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

5. 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.

6. 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 (1998-2008) • National models exist in most of the EU15 and some of the 12 NMS • Typically much more flexible than national models but in some cases covering the tax-benefit systems in less detail or more selectively • 19 EU countries: EE, PL, HU, SI + EU15 • Data either matches policy year or precedes it a few years (then uprated); three datasets (DK, IR, IT) from 1994-96

7. EUROMOD base datasets for EU15+4 (June 2008)

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

9. Main menu

10. Policies

11. Choice of data/policy years

12. Examples of EUROMOD use EUROMOD WPs illustrate types of model use • http://www.iser.essex.ac.uk/msu/emod/workingpapers/ 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? EM1/04 H Immervoll, H Jacobsen Kleven, C Thustrup Kreiner, E Saez: Welfare Reform in European Countries: A Micro-Simulation Analysis 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 EM6/07 F Figari, H Immervoll, H Levy and H Sutherland: Inequalities within couples: market incomes and the role of taxes and benefits in Europe EM2/08 A Paulus and A Peichl: Effects of Flat Tax Reforms in Western Europe on Equity and Efficiency

13. 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 (EU15), 2001 (EU15), 2003 (some), 2005 (some)* • EU15 + 4 only * • Permission to access some datasets is restricted * * work is underway or planned to remedy these limitations….

14. Becoming a EUROMOD user • Training and support • 2008 Summer training course (fully booked) • Other courses? • ECASS visits to Essex (for non UK-based people) http://www.iser.essex.ac.uk/ecass/ • Find out more http://www.iser.essex.ac.uk/msu/emod/ • The model itself, documentation etc can be downloaded free • Data access is an issue • Have a clear idea of what you want to use it for • Get in touch! euromod@essex.ac.uk