As SIMPL as that: Introducing a Tax-Benefit Microsimulation Model for Poland Olivier Bargain (University College Dublin) Leszek Morawski (University of Warsaw) Michal Myck (DIW-Berlin) Mieczyslaw Socha (University of Warsaw)

Outline 1. Introduction 2. Microsimulation idea 3. SIMPL a) Income data and data adjustments b) Simulated variables c) Calibrations d) Validation 4. Examples of applications 5. Research papers using SIMPL 6. Comments, conclusions and...

Introduction 1. Introduction 2. Microsimulation idea 3. SIMPL a) Income data and data adjustments b) Simulated variables c) Calibrations d) Validation 4. Examples of applications 5. Research papers using SIMPL 6. Comments, conclusions and...

Introduction a tax and benefit microsimulation model a tax and benefit microsimulation model - a computer program that combines information about households with tax and benefit rules in order to simulate hypothetical disposable income for households or families. a hypothetical disposable income - a sum of declared work income and benefits to which a household is eligible on the basis of its characteristics and work incomes

Outline 1. Introduction 2. Microsimulation idea 3. SIMPL a) Income data and data adjustments b) Simulated variables c) Calibrations d) Validation 4. Examples of applications 5. Research papers using SIMPL 6. Comments and conclusions

Microsimulation idea Orcutt Guy (1957), A new type of socio-economic system, Review of Economics and Statistics, 39(2), „Existing models of our socio-economic system have proved to be of rather limited predictive usefulness. This is particularly true with respect to predictions about the effects of alternative governmental actions and with respect to any predictions of a long-range character. It is even the case with respect to very short-run forecasting. (...) It is also true, but not so widely noticed, that current models of our socio-economic system only predict aggregates and fail to predict distributions of individuals, households, or firms in single or multi-variate classifications.” „However, existing models of socio-economic systems are neither built in terms of decision-making units (ie. individuals, households, and firms) nor are they well adapted to making use of knowledge about such units.”

Microsimulation idea This paper represents a first step in meeting the need for a new type of model of a socio-economic system designed to capitalize on our growing knowledge about decision-making units. Many more steps will be required and the labors of many individuals will be needed. Nevertheless, it seems reasonable to claim that models of the type suggested in this paper could perform a useful function, by facilitating and improving predictions about aggregative aspects of our socio-economic system, by facilitating and improving testing of hypotheses about behavior of individuals, households, and firms, and by furnishing guidance in the selection of research efforts. The most distinctive feature of this new type of model is the key role played by actual decision-making units of the real world such as the individual, the household, and the firm. In each time period, some types of behavior

Microsimulation idea This new type of model consists of various sorts of interacting units which receive inputs and generate outputs. (...) The units of this new type of model may, if desired, be large aggregates such as markets or industries, but in general they are elemental decision-making entities such as individuals, families, firms, labor unions, and governmental units. (...) An input into a unit is anything which enters into, acts upon, or is taken account of, by the unit. Inputs thus include what are commonly called economic inputs, but the concept is broader since they may include such things as rainfall, information, social pressures, age, etc. Inputs may have been produced as previous outputs of other units or they may derive from the physical environment. (...) An output from a unit is anything which stems from, or is generated by, the unit. It thus includes economic outputs, but may also include such things as expression of opinions, actions of all sorts, birth of a child, marriage, divorce, location, and death.

Microsimulation idea There are a variety of outputs which are possible for each type of unit in the model. The operating characteristics of any unit are equations, graphs, or tables which either determine outputs or the probabilities of possible outputs by the unit as a function of the previous inputs into the unit. Operating characteristics are, in general, re-garded as stable aspects of units.

Microsimulation idea Gross wage and self-employment income - employers’ social security contributions - employees’ social security contributions = Wages before taxation + other work income (fringe benefits etc.) + other taxable incomes (rents, capital income,...) = Total taxable income Total taxable income - income tax = Net Income + Family based social assistance + Social Assistance + Housing Benefit = Disposable Income Module 1: Social Security Contributions Module 2: Income Tax Module 3: Family benefits Module 4: Social Assistance Module 5: Housing Benefit The model database

Microsimulation idea Gross wage and self-employment income - employers’ social security contributions - employees’ social security contributions = Wages before taxation + other work income (self-employment income, fringe benefits etc.) + other taxable incomes (rents, capital income,...) = Total taxable income Total taxable income - income tax = Net Income + Family based social assistance + Social Assistance + Housing Benefita = Disposable Income Module 1: Social Security Contributions Module 2: Income Tax Module 3: Family benefits Module 4: Social Assistance Module 5: Housing Benefits The model database

Outline 1. Introduction 2. Microsimulation idea 3. SIMPL a) Income data and data adjustments b) Income data validation c) Simulated variables d) Calibrations e) Validation 4. Examples of applications 5. Research papers using SIMPL 6. Comments and conclusions

Data Household Budget Survey (HBS) 2003 & about households & more than individuals. 2.groups excluded from the HBS :  individuals in long-term care institutions,  prisoners,  students in boarding schools or student dorms,  soldiers living in the barracks. SIMPL database for households representing people, 2.Groups excluded from the SIMPL database  individuals from households with more then 8 people, or  individuals from households with more then 5 families.

Incomes work income 1.permanent income 2.temporary income 3.self-employment income 4.farmers’ income replacement income 1.old-age pension 2.disabilityy pension 3.family pension 4.pre-retirement pension 5.maternity benefit 6.social pension 7.alimony payment financial income 1.rents 2.investment income contributory benefits 1. rehabilitaton, sickness and funeral benefits

IncomeAdjustments Income Adjustments Net to gross conversion Rescaling the incomes in the top centiles for permanent employees and the self-employed so that the average income in these centiles matches that in the MF data Expected farmers’ income based on a linear model of the log of farm income.

IncomeAdjustments Income Adjustments

Average income in centile (1-99)Average income in centile (1-100)

Incomedatavalidation Income data validation

Incomedatavalidation2005 Income data validation 2005 Table A2 Principal income sources and income recipients in SIMPL

Validation2005 Validation 2005 Table A3 Aggregate validation: tax and social security contribution

Simulatedbenefits Simulated benefits Model nameTypeDescription Nursing Allowance (NA)FBNot means tested benefit for disability. Family Allowance (FA)FBMeans tested child benefit Parental leave allowance (PLA) FBMeans-tested benefit for voluntary parental leave. Supplement for child birth (SCB) FBLump sum for birth or adoption. Supplement for lone parents (SLP) FBMeans tested supplement for bringing up a child alone and the loss of the right to unemployment benefit. Supplement for large family (SLF) FBSupplement for third and subsequent children. Supplement for education of disabled child (SEDC) FBSupplement for education and rehabilitation of disabled child. Supplement for starting the school year (SSS) FBSupplement for education expenses. Nursing Benefit (NB)SASA FBMeans tested allowance for parents voluntarily on leave to care for disabled children.

Calibratedbenefits Calibrated benefits Social Assistance 1.Permanent SA (simulated) 2.Temporary SA (calibrated) a) Probit model of receiving TSA b) The threshold calibration to get the correct number of recipients 3. Special Circumstances SA (not simulated) Housing Benefit (calibrated) 1.imputed social rent cost per square meter by region 2.ceiling on the value of housing expenditure per person at the 75th percentile of housing expenditures per person in the data

Benefitsvalidation2005 Benefits validation 2005

Outline 1. Introduction 2. Microsimulation idea 3. SIMPL a) Income data and data adjustments b) Simulated variables c) Calibrations d) Validation 4. Examples of applications 5. Research papers using SIMPL 6. Comments and conclusions

Applications Research projects for the Ministry of Labor and Social Policy „Using microsimulation model as a tool supporting labor market analysis” 1. Static effects of tax and benefits reforms 2. Building a labor supply model for Poland 3. Labor supply effects of tax and benefit reforms Improving the Capacity and Usability of EUROMOD (I-CUE) (6th Framework Programme)  EUROMOD is a tax-benefit microsimulation model covering all 15 (pre-May 2004) Member States (MS) of the EU  It enables research on the effects of policies and policy reforms that have an impact on incomes, poverty, inequality and social inclusion  The aim of I-CUE is now to re-design and up-grade EUROMOD in light of the enlargement lessons learned from operating and using the first prototype version.

Budget constraints Components of disposable income – a single person without child Components of disposable income– a couple with two children Effective Marginal Tax Rate – a single person

Static reforms Reform SSI - disability social security contribution paid by employee is lowered from 6.5% to 4.5% Reform SSI - disability social security contribution paid by employee is lowered from 6.5% to 4.5%. Reform PIT - the personal income flat tax system with the rate of 18%. Poverty rate - the proportion of individuals living in households with income below 60% of the equivalised median income in the base system

Static effects PIT4: the flat tax rate of 18% with all other parameters of the tax and benefit system unchanged PIT5: the flat tax rate of 18% and removal of the universal tax credit of 530 zlotys per year

Introduction 1. Introduction 2. Microsimulation idea 3. SIMPL a) Income data and data adjustments b) Simulated variables c) Calibrations d) Validation 4. Examples of applications 5. Research papers using SIMPL 6. Comments and conclusions

Research papers 1st General Conference of International Microsimulation Association 1.Morawski L., Myck M., Nicińska A., Using microsimulation model to get things right: a wage equation for Poland 2.Bargain O., Morawski L., Myck M., Socha., SIMPL: A Microsimulation model for Poland Working Papers 1.Bargain O., Morawski L., Myck M., Socha., I-CUE Feasibility Study-Poland, EUROMOD... 2.Bargain O., Morawski L., Myck M., Socha., As SIMPL as that: Introducing a Tax-Benefit Microsimulation Model for Poland, IZA Discussion Paper 2..., 2007 (also as SIMPL DP1) 3.Haan P., Morawski L., Myck M., Taxes, benefits and financial incentives to work: Great Britain, Germany and Poland compared, SIMPL Discussioin Paper 2, Haan P., Myck M., Safety net still in transition: labour market incentive effects of extending social support in Poland, SIMPL Discussioin Paper 3, Myck M., Mimicking an informal wealth test with a wealth-test model: SIMPL: 2003 & 2005

Future... Potential current involvment (2007/2008) a) Country report for Poland (I-CUE project, untill the end of April 2008) b) Strategies to support children in Poland (I-CUE project) c) SIMPL development (SIMPL project, 2008) Future projects a) Economic risks and the ageing process – a comparative view on Germany and Poland (joint project with DIW from Berlin) b) EUROMOD-I3 (FP7 project, ) c) close cooperation with the Ministry of Labour and Social Policy