The distributional effects of income tax expenditures

The distributional effects of income tax

expenditures Silvia Avram

Holly SutherlandEUROMOD Microsimulation Workshop,

Lisbon, 2-3 October 2013

Definitions and terms Motivation Methodology Results

Total tax allowances & creditsBy type

Caveats and conclusions

Outline

Tax expenditure =tax concessions, tax advantages =“special exclusion, exemption, or deduction from gross

income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability”(Congressional Budget Act, 1974)

=provisions that decrease the net tax liability for some taxpayers

include general tax instruments / 0 band rates not distribution neutral

Distinguish between: Tax allowances= reductions in taxable income Tax credits= reductions in the initial tax liability

Non-taxable income not covered Structure (special rates, joint taxation etc.)

“given” Deferred liability treated as an allowance

Definitions and terms

Why tax expenditure? Important element of income taxation systems Total forgone revenues may be substantial Distributional effects not well understood

Previous work: measures and decomposition of the progressivity of the

tax system (Kakwani, 1977; Wagstaff et al., 1999; Wagstaff and Van Doorsaler, 2001; Verbist, 2004)

US studies specific methodology and results (Toder et al., 2009; Althuler and Dietz, 2011)

Not able to fully capture the interaction between the various elements of the tax system (ex: tax concessions affect the ATR)

Not able to capture the interactions with the larger T-B system

Not able to differentiate instruments by their design

Motivation

EUROMOD-simulation of income tax including most tax concession elements simulation of entitlements based on household and

individual characteristics and income tax rules (not actual payments)

Value of tax concessions (allowances/ credits): Gross: difference in net tax liability due to tax

concessions (interaction with other elements of the income tax system)

Net: difference in household disposable income due to the tax concessions (interaction with all other elements of the tax-benefit system)

“Dynamic de-composition”

Methodology (I)

Distinguish between: General =universal instruments applicable to all tax

payers (incl. 0 rate tax bands) Family= instruments targeted to taxpayers with

dependents (children, spouses, parents etc.) Vulnerable groups= instruments targeted at taxpayers

(or dependents) perceived to be economically insecure (ex: disabled, elderly, lone parents etc.)

Income related= instruments inversely correlated with (taxable) income

Types not exhaustive and not mutually exclusive! Value calculated the same way as total (i.e.

factoring in the interaction between the various tax concessions)

Methodology(II)

Dynamic de-composition elements do not sum up to total!

Not all tax allowances and credits simulated in EUROMOD (due to lack of info in the underlying dataset)

6 countries: CZ, DE, DK, ES, FR, IT 2010 income tax systems How much is covered:

Comparison of simulated net income tax/ administrative records statistics(2010) in CRs

....but many sources of inconsistencies some of which cancel each other

Admin sources of tax expenditure needed!

Methodology(III)

Overview of allowances & credits

CZ DE DK ES FR ITSocial insurance contributions A A A A A

0 tax bracket / general credit C A A A

Income related A A A A A & C A &C

Expenses (incl. work) A A A & C

Child related (incl. child care) C A C A &C C

Spouse /family members C C C

Mortgage interest A A C C C

Private/ occupational pension contr.

A A A A

Alimonies A A A A

Disability C C A & C

Lone parents A

Size: Annual expenditure on TA & TC

Source: EUROMOD G 1.0+ & EUROSTAT (for total government revenue)

CZ DE DK ES FR IT0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Tax expenditure as % of total income tax

Gross TA Net TA Gross TC Net TC

CZ DE DK ES FR IT0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Tax expenditure as % gov. revenue

Gross TA Net TA Gross TC Net TC

Size: Proportion entitled by quintile

Note: Quintiles are based on household equivalised disposable income when no tax allowances/ credits are present Source: EUROMOD G1.0

All Q1 Q2 Q3 Q4 Q50

20

40

60

80

100

120

Tax allowances

CZ DE DK ES FR IT

All Q1 Q2 Q3 Q4 Q50

20

40

60

80

100

120Tax credits

CZ DE DK ES FR IT

Concentration Curves0

.2.4

.6.8

1Cum

mulative allowan

ces sh

are

0 .2 .4 .6 .8 1Cummulative income share

CZDEDKESFRITEquality

0.2

.4.6

.81

Cum

mul

ativ

e cr

edits

sha

re


CZDEDKESFRITEquality

Tax allowances Tax Credits

Source: EUROMOD G1.0

Average TA as % of rank HDI

Note: Quintiles are based on household equivalised disposable income when no tax allowances/ credits are present Source: EUROMOD G1.0

All Q1 Q2 Q3 Q4 Q50

5

10

15

20

25

Tax allowances-gross

CZDEDKESFRIT

All Q1 Q2 Q3 Q4 Q5

-5

0

5

10

15

20

25

30

Tax allowances- net

CZDEDKESFRIT

Average TC as % of rank HDI

All Q1 Q2 Q3 Q4 Q50

5

10

15

20

25

Tax credits-gross

CZDEDKESFRIT

All Q1 Q2 Q3 Q4 Q50

5

10

15

20

25

Tax credits-net

CZDEDKESFRIT

Tax allowances Tax creditsKakwani Reynolds-

Smolensky

VE Kakwani Reynolds-Smolensky

VE

CZ 0.3649 -0.0011 -0.001 -0.0859 0.0056 0.0086DE 0.1247 -0.0127 -0.0116 - - -DK -0.033 0.0038 0.0057 - - -ES 0.0379 -0.0026 -0.0023 -0.0878 0.0078 0.0086FR -0.0183 0 0.0014 0.0013 0 0IT 0.1572 -0.0063 -0.006 -0.2842 0.024 0.0243

Progressivity/ redistribution indices

General instruments0

.2.4

.6.8

1Cum

mulat

ive

allowan

ces sh

are


DKDEFREquality

Concentration curve-General tax allowances

0.2

.4.6

.81

Cum

mul

ative

cred

its s

hare


CZESEquality

Concentration curve-General tax credits

Family related instruments0

.2.4

.6.8

1Cum

mul

ative

allo

wan

ces

shar

e


DKDEFRESEquality

0.2

.4.6

.81

Cum

mul

ativ

e cr

edits

sha

re


CZESITEquality

Concentration curves-Family tax allowances

Concentration curves-Family tax credits

Instruments targeted at vulnerable groups

0.2

.4.6

.81

Cum

mul

ativ

e al

low

ance

s sh

are


DEFRESEquality

0.2

.4.6

.81

Cum

mul

ativ

e cr

edits

sha

re


CZFRESITEquality

Concentration curves: VG tax allowances Concentration curves: VG tax credits

Income related instruments0

.2.4

.6.8

1Cum

mulat

ive

allowan

ces sh

are


FRESITEquality

0.2

.4.6

.81

Cum

mul

ative

cred

its s

hare


CZFRESITEquality

Concentration curves- IR tax allowances

Concentration Curves: IR tax credits

Tax expenditure may be sizeable (~10% of gov. revenue)

Both TA & TC generally regressive Winners are mostly in the middle and top of the

distribution larger shares of the outlays go to the middle and top of

the distributions Bottom quintile may get (almost) nothing (TA in CZ, TC

in FR) Progressivity varies but generally TAs more

regressive than TCs Some tax instruments can be strongly progressive

Ex: family TAs in DK; family TCs in IT; IR TAs in FR General instruments-always regressive

Summary of results (I)

The more progressive the tax schedule the stronger the regressive effect of TAs DE: regressive TAs likely due to the progressivity

adjustment Interaction with the wider TB system can modify

impact FR: TA reducing the income concept used to assess

eligibility for many benefits net effect much stronger than gross at the bottom

Interactions between TAs and TCs reducing one increase another

Generally-difficult to target via the tax system Most of IR/ VG instruments not progressive Taxpaying unit and incomes used for targeting may limit

effectivenss Overall impact on inequality-small

Summary of results (II)

Simulation limitations: Not all instruments simulated cross-country

comparisons more valid in the sub-types than in the aggregate

Not considering the impact of exemptions (i.e. whole categories of income which is not taxed)

Calculations based on theoretical entitlements and liability limited consideration of tax-evasion (IT only) and non-take-up of tax advantages

No behavioural effects

Caveats

Thank you!

The distributional effects of income tax expenditures

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