© Institute for Fiscal Studies
Microsimulation in the UK: TAXBEN
Stuart Adam, IFS
Workshop on microsimulation modelling for fiscal policy analysis
European Commission Joint Research Centre, Seville
23 September 2016
© Institute for Fiscal Studies
TAXBEN
• Static microsimulation model of the UK tax and benefit system
• First built early 1980s, continuous development since
– Now increasing investment in upgrades
• Current version written in Delphi (Object Pascal)
• Not open source, and poorly documented (for now)
© Institute for Fiscal Studies
Coverage
Tax and benefit systems since 1975
– Plus, crucially, hypothetical alternatives
Includes:
• Income tax
• Employee and employer social security contributions
• Council tax (local housing tax)
• VAT
• Most taxes on specific goods (fuel, alcohol, tobacco)
• State pensions and all significant state benefits and tax credits
But not:
• ‘Capital taxes’: capital gains tax, inheritance tax, stamp duties (property and share transaction taxes)
• ‘Business taxes’: corporation tax, business rates (property tax)
• Public services
© Institute for Fiscal Studies
Data
• Runs on several household survey datasets (with population weights)
– Family Resources Survey (from 1994)
– Living Costs and Food Survey (from 1978)
– English Longitudinal Study of Ageing (from 2002)
– (Labour Force Survey 2007)
• Hoping to add more soon
– Wealth and Assets Survey
– Understanding Society
• Also simulated datasets (e.g. simulated lifecycles)
• Not administrative data
– Doesn’t contain crucial information (family circumstances, rent, etc.)
– Sometimes use it separately
© Institute for Fiscal Studies
Static model
• Single period
• No behavioural responses or economic effects embedded in model
• But used extensively as input to behavioural modelling
– e.g. TAXBEN-generated budget constraints used to estimate labour supply models and simulate labour supply under different tax and benefit systems
– also consumer demand systems, etc.
• Allows us to use different behavioural models as appropriate
– Best model to use won’t be the same in every case
– TAXBEN calculator can be called by other programs
• Recent development: FORTAX
– Slimmed-down tax and benefit model written in Fortran
– Less functionality than TAXBEN, but faster
– Useful for dynamic lifecycle models of behaviour (need millions of runs)
© Institute for Fiscal Studies
Main UK microsimulation models outside IFS
• Static tax and benefit models
– IGOTM (HM Treasury) and PSM (Department for Work and Pensions)
– EUROMOD (based at University of Essex)
– One or two think tanks
• Dynamic models with a tax/benefit element
– PENSIM2 (Department for Work and Pensions)
– SAGE (LSE)
– LINDA (developed by NIESR, occasionally used by HM Treasury)
© Institute for Fiscal Studies
The Institute for Fiscal Studies
• An independent not-for-profit microeconomic research institute
• Aim: ‘to promote the development of effective policy on taxation and government spending by providing high-quality impartial evidence and analysis to inform the public debate’
– Bridge the gap between academia and policy discussion
• About 50 research staff, of whom about 6 main TAXBEN users
– Plus network of academic Research Fellows etc.
• Funded by research grants
• Unique and important role in UK policy debate
© Institute for Fiscal Studies
How is TAXBEN used?
• Best known for estimating revenue and distributional effects
• Also analysis of work incentives...
– Interesting in its own right
• ...which feeds into labour supply modelling
– Estimating/simulating effects of policies on employment, hours of work, earnings
• Input to other behavioural modelling too
– Benefit take-up, consumer demand, human capital investment, etc.
© Institute for Fiscal Studies
When is TAXBEN used?
Reactive:
• Day after Budgets etc.
• Election campaigns (government’s record, parties’ proposals)
• Ad hoc analysis of new announcements/proposals
Proactive:
• Annual IFS Green Budget (analysis of options for Budget)
• Academic / policy research projects
– ‘The trade-off between work incentives and redistribution’
– ‘A retrospective evaluation of the EU VAT system’
– ‘The effect of working families’ tax credit on lone mothers’ labour supply’
– The Mirrlees Review of taxation
Increasing the income tax personal allowance Distributional impact of an increase from £10,000 to £12,500
© Institute for Fiscal Studies
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Poorest 2 3 4 5 6 7 8 9 Richest All
Ch
an
ge
in
ne
t in
com
e
Household net income decile group Assumes higher-rate threshold held constant.
Source: Figure 7.4 of The IFS Green Budget: February 2014
Impact of tax and benefit reforms between January 2010 and April 2019
Source: IFS post-Budget briefing, July 2015
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
-£7,000
-£6,000
-£5,000
-£4,000
-£3,000
-£2,000
-£1,000
£0
Poorest 2 3 4 5 6 7 8 9 Richest All
Income decile group
£ per year (left axis)
% of net income (right axis)
© Institute for Fiscal Studies
© Institute for Fiscal Studies
In cross-section, increase in out-of-work benefits is most progressive
0
.01
.02
.03
.04
.05
Pro
po
rtio
na
l ch
an
ge
in
ne
t in
com
e
Poorest 2 3 4 5 6 7 8 9 Richest All
Net income decile
Out-of-work benefits In-work benefits Income tax
© Institute for Fiscal Studies
Over the lifetime, increases in in-work and out-of-work benefits are similarly progressive
0
.00
2.0
04
.00
6.0
08
Pro
po
rtio
na
l ch
an
ge
in
ne
t in
com
e
Poorest 2 3 4 5 6 7 8 9 Richest All
Net income decile
Out-of-work benefits In-work benefits Income tax
© Institute for Fiscal Studies
Explanation: the poorest individuals spend most of working-age life in work
0.2
.4.6
.81
Pro
po
rtio
n e
mp
loy
ed
Poorest 2 3 4 5 6 7 8 9 Richest All
Cross-section Lifetime
Effect of tax and benefit reforms on income inequality
© Institute for Fiscal Studies
-0.04
-0.03
-0.02
-0.01
0.00
0.01
0.02
0.03
0.04
0.05
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2009
Ch
an
ge
in
Gin
i
Uprated in line with RPI
Uprated in line with GDP
Taxes RPI-uprated, benefits GDP-uprated
Source: Adam and Browne (2010)
© Institute for Fiscal Studies
Universal credit and relative poverty rates
10%
15%
20%
25%
2010 2011 2012 2013 2014 2015 2016
Child poverty (BHC) Working-age non-parent poverty (BHC)
Without UC Without UC
With UC With UC
Note: take-up assumptions important here
Source: J. Browne, A. Hood and R. Joyce (2013), Child and working-age poverty in
Northern Ireland from 2010 to 2020
© Institute for Fiscal Studies
Effect of universal credit on work incentives
Percentage point change in average:
RR PTR EMTR
Single, no children –0.9 –1.5 +0.7
Lone parent +0.3 +3.6 –5.2
Partner not working, no children –3.2 –3.4 –0.4
Partner not working, children –5.7 –10.7 +1.2
Partner working, no children +0.1 +0.1 –0.3
Partner working, children +0.9 +2.5 +0.0
All –0.7 –0.7 –0.1
UC gets rid of many of the very weakest work incentives:
– reduces number of people with PTRs >75% by half (1.5m)
– reduces number of people with EMTRs >85% by more than 90% (0.5m)
Effect on average work incentives:
Source: Adam and Browne (2013)
© Institute for Fiscal Studies
Effect of UC on average PTR, by earnings
-30
-25
-20
-15
-10
-5
0
5
10
15
£0 £10,000 £20,000 £30,000 £40,000 £50,000
Ch
an
ge
in
me
an
PT
R (
pp
ts)
Labour cost
All Single, no children
Lone parent Partner not working, no children
Partner not working, children Partner working, no children
Partner working, children
Source: Adam and Browne (2013)
Distribution of VAT payments in the UK
© Institute for Fiscal Studies
€0
€20
€40
€60
€80
€100
€120
€140
€160
€180
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Poorest 2 3 4 5 6 7 8 9 Richest
Income Decile Group
% of income % of expenditure Cash amount (€/week, right axis)
Source: IFS et al, ‘A retrospective evaluation of the EU VAT system’
Distribution of VAT payments in the UK
© Institute for Fiscal Studies
€0
€20
€40
€60
€80
€100
€120
€140
€160
€180
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Poorest 2 3 4 5 6 7 8 9 Richest
Expenditure Decile Group
% of income % of expenditure Cash amount (€/week, right axis)
Source: IFS et al, ‘A retrospective evaluation of the EU VAT system’
Revenue-neutral move to a uniform VAT rate Effect on spending shares
© Institute for Fiscal Studies
Good Category Existing system Revenue-neutral
uniform VAT rate
Zero-rated food 12.1% 13.1%
Standard-rated food, catering and alcohol 12.1% 10.9%
Leisure goods and services (inc. tobacco) 22.3% 22.4%
Domestic energy 5.7% 6.7%
Household goods and services 11.9% 12.7%
Personal goods (inc. clothes) and services 14.5% 14.4%
Private transport 19.2% 18.4%
Other zero-rated goods 2.3% 1.4%
Source: IFS et al, ‘A retrospective evaluation of the EU VAT system’
Revenue-neutral move to a uniform VAT rate Effect on welfare
© Institute for Fiscal Studies
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
Poorest 2 3 4 5 6 7 8 9 Richest Average
We
lfa
re g
ain
/lo
ss a
s %
exp
en
dit
ure
Income Decile Group
Source: IFS et al, ‘A retrospective evaluation of the EU VAT system’
Distributional impact of changes 2015-2019
Figure 1. Personal tax and benefit measures Figure 2. ‘National Living Wage’
-1,400
-1,200
-1,000
-800
-600
-400
-200
0
200
400
£ p
er
ye
ar
Net income decile group
-1,400
-1,200
-1,000
-800
-600
-400
-200
0
200
400
Net income decile group
Source: Joyce (2015) © Institute for Fiscal Studies
© Institute for Fiscal Studies
Microsimulation in the UK: TAXBEN
Stuart Adam, IFS
Workshop on microsimulation modelling for fiscal policy analysis
European Commission Joint Research Centre, Seville
23 September 2016
Top Related