The area of indirect taxes is identified by the European Commission as an important domain for tax policy reforms with potentially wide-ranging socioeconomic effects. There is a renewed interest in tax shifts that reduce labour taxes and increase taxes on commodities, keeping the overall government revenue fixed. While often desirable from an economic or fiscal perspective, these shifts might entail substantial distributional changes. Microsimulation models are particularly suited to investigate how fiscal policy reforms affect different income groups or subgroups of the population.
This report documents the work done to integrate indirect tax simulation into EUROMOD – the tax-benefit microsimulation model for the European Union – as part of the project “EUROMOD extension to indirect taxation”. The project delivered an Indirect Tax Tool (ITT) plug-in for EUROMOD that allows the analyst to perform static microsimulation analyses for 10 EU countries in a comparable way on a single platform. The tool allows the evaluation of both the budgetary effects and the equity impact of (simultaneous) reforms to direct and indirect tax policies and to the social benefit system. In order for the tool to work, for the 10 countries covered, consumption expenditures from national Household Budget Survey (HBS) data were used to inform the imputation of expenditure into the existing EUROMOD input data based on the Survey of Income and Living Conditions (SILC). Engel curves were estimated on the aggregated HBS data and the resulting parameter estimates are then used by the ITT in the imputation of expenditures to the EUROMOD input data. Alongside this imputation, indirect tax policy rules have been coded in the country models allowing the tool to produce baseline results for all countries. In a departure from the original proposal to describe and code policy systems up to 2014, systems have been coded for the whole of the period 2011-2016 for all countries.
The project was conducted jointly by the Department of Economics of the University of Leuven and the Institute for Social and Economic Research (ISER) at the University of Essex.
The remainder of this report is organised as follows. In section 2, we provide a brief summary of the project’s achievements against the specified tasks, signposting the reader to where she or he might access more detailed information in this report. In section 3, the methodologies for estimating the Engel curves and for the calculation of indirect tax liabilities in the model – including the behavioural assumptions behind those calculations – are described. In section 4, cross-country comparative technical information is provided, including differences in expenditure category definitions, in the scope of simulations, and in the indexation factors used; comparative baseline results are also produced. In section 5, an example policy reform – involving a revenue-neutral switch from direct to indirect tax across all 10 countries – is analysed in terms of its distributional effects. Section 6 offers conclusions across the project as a whole.