Federal Planning Bureau Economic analyses and forecasts Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE Some work in progress Jean-Charles Wijnandts 1, Gijs Dekkers 2 and Raphaël Desmet 3 1. University of Liège (student internship at the FPB) 2. Federal Planning Bureau and Katholieke Universiteit Leuven 3. Federal Planning Bureau Paper presented at the Ministero dell'Economia e delle Finanze, Rome, February 15 th, 2011

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress  Overview of this presentation  What is the relevance of taking into account taxes and social contributions?  The system of taxes and contributions in Belgium  A comparison of gross and net simulation results

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress  Overview of this presentation  What is the relevance of taking into account taxes and social contributions?  The system of taxes and contributions in Belgium  A comparison of gross and net simulation results

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress  1)The system of taxes and social contributions redistributes income  Progressivity of taxes: increasing marginal tax rates  Deductions for replacement incomes and such.  2) Ultimately, the indirect measurement of inequality and poverty is about approaching welfare. Net income is more relevant for consumption possibilities than gross income, hence the stronger conceptual link with welfare.  Policy measures pertaining to the system of taxes and social contributions affect poverty and redistribution via the fiscal system.

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress  Overview of this presentation  What is the relevance of taking into account taxes and social contributions?  The system of taxes and contributions in Belgium  A comparison of gross and net simulation results

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress  1)Deduction of professional costs:  2)Computation of taxable income, i.e. earnings minus social security contributions and deductible professional costs (when applicable)  3)Determination of marriage coefficient: this coefficient applies when one of the partners’ taxable incomes is lower than 30% of the household’s taxable total income.  determine the income source for the donating partner (mquot=2) when the marriage coefficient applies  associate the income source of the donating partner to the receiver (mquot=1)  determine the amount to be added to income poor partner.  The marriage coefficient amount is added to the income of the poor partner, with respect to the income source of the donating partner

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress  Subtract the same amount from the income of the rich partner  Determine taxable income after application of the marriage coefficient  Compute deductions  Compute tax amounts  Determine reduction for old-age pension benefits and disability benefits  Apply horizontal limitation, vertical limitation, proportionality limitation  Apply deduction for replacement incomes  Apply a minimum taxable income  Compute after-tax income

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress  Overview of this presentation  What is the relevance of taking into account taxes and social contributions?  The system of taxes and contributions in Belgium  A comparison of gross and net simulation results

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress Gross and net annual wage, prices of 2002, in euro Gross and net annual retirement benefits, prices of 2002, in euro Gross and net annual conventional early leave benefits, prices of 2002, in euro Gross and net annual unemployment benefits, prices of 2002, in euro Gross and net annual disability benefits, prices of 2002, in euro

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress Gini index by status The main conclusion is that inequality of net incomes is consistency lower than of gross figures, reflecting the redistributive impact of the system of taxes and social security contributions.

Federal Planning Bureau Economic analyses and forecasts The gross-net trajectory in MIDAS_BE: some work in progress Risk of poverty rate, in percent The marginal tax rate for pensioners is lower than for workers, and –in relative terms- expressing income in net instead of gross terms is beneficiary to pensioners relative to workers. The poverty risk of pensioners decreases and – hence - the poverty risk of workers increases. On the whole, however, due to the reduction in inequality, the risk of poverty of the population as a whole decreases.

Federal Planning Bureau Economic analyses and forecasts Conclusions  Expressing the adequacy of social security benefits conceptually reinforces the relation between income and welfare  It also expands the model in assessment of fiscal policy  Including the system of taxes and social contributions reduces income inequality  Including the system of taxes and social contributions reduces poverty among pension recipients, and increases the poverty risk of earning recipients.  Due to the lower income inequality, especially on the low end of the income distribution, the overall poverty risk increases.