Distributional and Poverty Effects of Income Tax Reform in Serbia

1. Distributional and Poverty Effects of Income Tax Reform in Serbia Sasa Randjelovic Jelena Zarkovic Rakic University of Belgrade – Faculty of Economics Foundation for Advancement of Economics World Bank Conference: “Poverty and Inclusion in Western Balkans” Brussels, 14 December 2010

2. Outline • Rationale for the research • Literature review • Data and methodology • Results • ...effects on inequality • ...effects on vertical equity • ...effects on poverty • Conclusion

3. Rationale for the research • Current income tax in Serbia – inefficient and inequitable • Income tax reform on the top of policy agenda • Several reform scenarios are being considered • Aim of our paper: • Ex-ante analysis of distributional, vertical equity and poverty effects of two reform scenarios

4. Literature review • Distributional effects of income tax reform was subject to numerous empirical researches • ...usually, by means of microsimulation analysis • ...in Western Europe and North America: • Decoster, et. al. (2008) – Belgium • Fuest, et. al. (2008) - Germany • Jacobs, et. al. (2007) – the Netherlands • Diaz-Gimenez (2007) – the USA • ...in Central and East Europe: • Paulus, et. al. (2009) – Estonia, Hingary, Slovenia

5. Data and methodology • EUROMOD – European Tax & benefit microsimulation model, developed by the University of Essex (the UK) • 19 EU member states (15 old + 4 new member states) • ...the model for the remaining 8 EU member states is currently being developed • Advantage to national MSMs: enables comparative analysis accross countries

6. Data and Methodology • SRMOD – microsimulation model for Serbia • The first model of that kind outside the EU • Developed on EUROMOD platform (2009-2010.) • Authors: University of Belgrade (FREN) research team (Arandarenko, Avlijaš, Ranđelović, Žarković Rakić, Vladisavljević) • Plans: formal integration in EUROMOD, development of microeconometric labour supply model, application... • Dataset used in SRMOD: • Living Standard Measurement Survey 2007 • Survey performed by the Statistical Office of Serbia • Sample: 5,557 households, 17,375 individuals

7. Rational for income tax reform and possible scenarios • Current income tax system in Serbia: • Mixed (hybrid) model, with strong scheduler component • Disadvantages: lack of equity (both horizontal and verical), limited redistributive effects • Flat, dual or comprehensive income tax reform? • Revenue neutral reform scenarios

8. Results: What would be the impact of the reform on income distribution (Gini approach)? • Inequality would decrease after income tax reform • Comprehensive income tax reform would trigger somewhat larger redistribution, than flat tax • ...but redistributive power or tax system still modest

9. Results: Who would be better-off and who would be worse-off after income tax reform? • Under both scenarios – redistribution from the richest to the middle class • Compreh. tax provides better structure of redistribution • No possitive effects on the poorest

10. Results: Poverty effects of tax reform? • Very limited effects on poverty • Disposable income of bottom decile is not to change

11. Results: Vertical equity effects of tax reform • Increase in progressivity (vertical equity) • CIT more progressive than the flat tax • ...but still much less than OECD average (M-T index of 1.08)

12. Concluding remarks • Both reform scenarios reduce inequality and improve vertical equity • CIT more effective than flat tax • Redistribution from the richest to the middle class • CIT triggers somewhat better structure of redistribution • Very limited effects on reduction of poverty • Due to lack of change in disposable income of bottom decile • Further research • Distributional effects of dual income tax? • Efficiency effects of various income tax reform scenarios