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Distributional impact of alternative financing of social security

Distributional impact of alternative financing of social security. André Decoster Centrum voor Economische Studiën KULeuven m.m.v. Bart Capéau, Kris De Swerdt, Kristian Orsini Gerre Verbist Centrum voor Sociaal Beleid Herman Deleeck Universiteit Antwerpen

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Distributional impact of alternative financing of social security

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  1. Distributional impact of alternative financing of social security André Decoster Centrum voor Economische StudiënKULeuvenm.m.v. Bart Capéau, Kris De Swerdt, Kristian Orsini Gerre Verbist Centrum voor Sociaal Beleid Herman DeleeckUniversiteit Antwerpen Seminarie FOD Sociale Zekerheid – 13 februari 2006

  2. Structure of the exposition • Some insights from tax theory • Empirical assessment: • incidence analysis of indirect taxes (ASTER) • incidence analysis of social security contributions (MISIM) • effect of one scenario of shifting financing social security from employee contributions to indirect taxes • Summary and plans for further research 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  3. Focus of the analysis • only one alternative source: indirect tax • more specifically VAT • but policy relevant (Germany) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  4. Insights from a theoretical perspective tax on income from capital (on savings) tax on labour income • is unjust • “distorts” labour/capital choice is a “distortion” causing “problems” remove this tax remove this tax 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  5. Insights from a theoretical perspective • there is a revenue constraint: separate discussion about size of government, amount of public goods • about “distortion”: in absence of lump sum instrument (“first best”), there is indeed a welfare cost associated with taxation (“second best”) • e.g. labour income tax changes relative price consumption/leisure and induces changes in this choice, can be expressed as efficiency loss of collecting revenue • But insight modern public finance: in second best world, removing one single distortion does not necessarily improve the situation (or: you do not minimize welfare loss by minimizing number of distortions) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  6. Insights from a theoretical perspective • therefore question becomes: is shift from labour income tax to indirect tax welfare improving: • from efficiency point of view (less excess burden) • from distributional point of view • what is the difference between labour income tax and indirect tax? • if proportional, and no other income: NONE! • based on fundamental identity: income = spending 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  7. Insights from a theoretical perspective tax on labour income tax on consumption 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  8. Insights from a theoretical perspective • Example: 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  9. Insights from a theoretical perspective • equivalence implies: • one does not remove the distortion from the income tax by switching from labour income tax to a uniform commodity tax • using proportional commodity taxes amounts to removing the progressivity of the (labour) income tax • Optimal Tax-theory: • distortion (of labour income tax) might be decreased by differentiating the indirect tax structure; taxing complements with leisure at a higher rate • might be more efficient to redistribute by means of differentiated indirect tax than by means of progressive income tax • Conclusion: simplistic argument “remove distortion” does not hold 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  10. Insights from a theoretical perspective • what about taxation of savings? • income = spending + saving • intertemporal model is needed: • uniformity result: not taxing saving (expenditure tax) • why depart from uniformity? • efficiency arguments (new distortion: relative price between consumption now and consumption later is changed) • distributional considerations: weight attached to different generations 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  11. Insights from a theoretical perspective: conclusion • theoretical arguments point in different directions • it is the joint effect of all distortions that matters, unilaterally removing just one (or a few) does not necessarily lead to welfare improvement • Pareto-improvements (which are at the core of the theoretical analysis) depend on the initial situation. This is not necessarily the real world situation • Distributional concerns matter • Hence: empirical assessment through simulation experiment is valuable 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  12. Structure of the exposition • Some insights from tax theory • Empirical assessment: • incidence analysis of indirect taxes (ASTER) • incidence analysis of social security contributions (MISIM) • effect of one scenario of shifting financing social security from employee contributions to indirect taxes • Summary and plans for further research 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  13. Empricial assessment: MISIM and ASTER combined Labour cost Employer contributions Gross incomes PIT Employee contributions Net incomes SEP Budget survey Indirect taxes Indirect taxes detailed consumption & taxes detailed consumption & taxes MISIM ASTER 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  14. Incidence of indirect taxes • indirect tax structure differentiates between commodities • which interacts with the differentiated consumption patterns of households • we use the budget survey of 2001 • to show these expenditure patterns • and hence the variation in indirect tax burden 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  15. % of total expenditures subjected to different VAT-rates (NIS Budget Survey 2001) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  16. Structure of total expenditures (average income shares) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  17. Structure of expenditures • conceals considerable heterogeneity across households • e.g.: variation in function of disposable income • share of food 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  18. income share of food expenditures (NIS budget survey 2001) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  19. income share of food expenditures (NIS budget survey 2001) • might be explained by: • income • household size • age of hh members • many other characteristics • preferences in general 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  20. Stylized representation of food share 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  21. Non parametric estimations of income shares (Kernel) • Hence, to impute an expenditure structure in a dataset without expenditures (e.g. CSB), we need to estimate this relationship • is done by means of econometric estimation in which following explanatory variables help to explain the income shares: • disposable income • household composition (size, age) • region • there remains unexplained variation 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  22. Estimation of income share “domestic fuel oil” 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  23. estimation of income share “saving” 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  24. Some Kernel-Engelcurves (income shares) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  25. Some Engelcurves 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  26. Some Engelcurves 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  27. Result 1: % of expenditures in VAT-classes (by decile) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  28. Result 2: Incidence of VAT by decile 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  29. Incidence of Excise by decile 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  30. Incidence of indirect tax (VAT+excise) by decile 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  31. MISIM = MIcroSImulationModel of social security and personal income tax • developed by the Centre for Social Policy • On the basis of data of Socio-Economic Panel (SEP) 1997, indexed up to 2005 • Policy rules of August 2005 for calculation of • social security contributions of employer • social security contributions of employee • personal income tax 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  32. Calculation contributions employer • contribution employer for private and public sector • private sector: difference between blue and white collar, and number of employees is taken into account • reduction of contribution employer • structural reduction (in MISIM) • specific reductions (only partially in MISIM) • other reductions (not in MISIM) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  33. Calculation contributions employee • Own contributions for public and private sector • 13.07% in private sector and public sector without tenure contract (blue/white collar) • 11.05% civil servants • reduction for low labour incomes (“werkbonus”) • own contributions for self-employed • contributions on replacement incomes (pensions, sickness and invalidity) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  34. Distribution by decile of welfare (MISIM 2005)(private and public sector, self-employed) 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  35. Employees: % contribution on gross wage by decile 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  36. Self-employed: % contribution on gross labour income by decile 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  37. Replacement incomes: % contribution on gross pension by decile 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  38. Scenario for alternative financing of Social Security Gross wage • Contribution: 13.07% (private) / 11.05% (public) • Reduction: -15% • application of workbonus Taxable income Personal income tax Net disposable income Note: own contributions self-employed and replacement incomes do not change! 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  39. Scenario for alternative financing of Social Security • Only effect (and direct): disposable income, not on labour cost (and hence labour demand) • labour demand perfectly elastic (horizontal) • No effect on labour supply (preliminary) • labour supply: perfectly inelastic (vertical) • Revenue neutrality by increase of indirect taxes (VAT, not excises) • Behavioural reactions through budget shares that respond on change in disposable income 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  40. Revenue neutrality • Increase VAT to collect additional revenu of 0,8 bn €? • No, since ASTER only captures VAT-receipts from consumption by private households • Ratio ASTER VAT/Total VAT=67% • Hence: increase VAT to get 0.67x798 = 535 million € 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  41. Revenue neutrality • scenarios to collect the 535 million €: 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  42. Change in consumer price for scenario A and B 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  43. Change in consumer price for scenario A and B 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  44. Evaluation for each household • income change: disposable income of those who earn labour income as employee increases • price change: to buy the same bundle of commodities, one needs more income • average effect for the two scenario’s (€ of 2005): 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  45. Income and price change by decile: Scenario A 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  46. Income and price change by decile: Scenario B 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  47. welfare change by decile: Scenario B 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  48. Income and price change by socio-professional group: Scenario B 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  49. welfare change by socio-professional category: Scenario B 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

  50. Caveat’s • Labour supply reaction not taken into account • but research in other context: might be small • preliminary research on PSBH-dataset by means of discrete choice model of labour supply (only for couples): 13 februari 2006 Verdelingseffecten alternatieve financiering sociale zekerheid Prof. A. Decoster

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