1. N ational T ransfer A ccounts Data Review (Hands On) Amonthep Chawla East-West Center & Nihon University Population Research Institute

2. N ational T ransfer A ccounts Objectives ► To understand your surveys: your surveys may not provide all information needed to construct NTA  Understand purposes of surveys  Review questionnaires  Any missing information on income, expenditure and demographic characteristics ► To aware that you may encounter estimation problems due to outliers, missing data, sampling weights, smoothing, etc. ► To prepare survey data before estimating age profiles necessary for NTA

3. N ational T ransfer A ccounts Outline ► I. Demographic variables ► II. Data cleaning ► III. Components and classifications of expenditures ► IV. Components of income ► V. Smoothing

4. N ational T ransfer A ccounts I. Demographic Variables ► Age of individuals: what is the age limit? ► Dummy for household headship ► Dummy for school attendance (currently attending school or not) ► Education level for school attendance (if currently attending school, what is the level of education: primary, secondary or higher education) ► Health characteristics (number of times visiting hospitals, health usage or any information regarding to health condition) ► Sampling weights (always use weight option)

5. N ational T ransfer A ccounts Household Heads ► How household heads are defined: economic head or self-reported head? ► Each household should have one person as a household head  Two or more household heads: pick the oldest or the highest income, depending on culture or norm  No head: assign one person ► What is the minimum age for head?; should he/she be older than 15? Need to understand laws and culture of the country

6. N ational T ransfer A ccounts Education: Enrolment Rates ► Plot enrolment rates by age and by education level ► How does the result differ from other surveys, i.e. census and other government document? ► Any information on private or public school enrolment ► Check minimum and maximum age of school enrolment ► Is there minimum age of school enrolment for the kindergarten level? ► Be aware that childcare is not education

7. N ational T ransfer A ccounts II. Data Cleaning ► Need to carefully check survey data in order to avoid or detect possible data problem by  summarizing data, using sampling weights, to check for missing data, outliers, data underestimating or overestimating, etc.  Using scatter plots to detect outliers: be aware that some extremely high health consumption (usually by the elderly) may be real ► Missing data: replaced with 0 or imputed, depending on how serious this problem is

8. N ational T ransfer A ccounts III. Components and Classifications of Expenditures ► Two types of expenditure: consumption and non- consumption expenditure ► Avoid using non-consumption expenditure to estimate NTA private consumption ► Examples of non-consumption expenditures are  transfers (i.e., taxes, gifts or other transfers made to other households)  asset income (negative asset income such as interest expense on mortgage or consumer debt) ► Be cautious if using individual consumption rather than household consumption, i.e. missing data

9. N ational T ransfer A ccounts Including non-consumption Only consumption Double-hump consumption is more outstanding when non- consumption is included

10. N ational T ransfer A ccounts Income Tax ► How to estimate income tax at the individual level: 2 methods  1. Using household tax expenditures and allocating to each members proportionally to their taxable income  2. Not using household tax data but using individual taxable income directly to measure individual tax payments ► What are the tax rates in these two methods? ► The first method allows for household level variation in the tax rate while the second method assumes that all household income is taxed at the same rate

11. N ational T ransfer A ccounts Income Tax (cont.) ► Method 1 is preferred as it gives better information on who actually pay taxes ► Be cautious: income tax data may be underestimated or not reported ► If possible, check both methods and examine how different the age profiles of income tax based on two methods are

12. N ational T ransfer A ccounts Check: On what types of income is income tax levied in your economy? Not using household tax data leads to overestimate taxes paid at older ages in Japan

13. N ational T ransfer A ccounts IV. Components of Income ► Household surveys report income either at the individual level or the household level ► Unit of analysis for NTA is at the individual level: individual income is needed ► Assignment of income  labor income: assigned to individual members  asset income and transfer income: assigned to household head

14. N ational T ransfer A ccounts IncomeAssignment Wage or Earnings Individual Labor’s share of self- employed (or family business) income Individual (household income is distributed to individuals using NTA method) Taxes, pension, and other cash transfers from the government Individual Capital’s share of self- employed income Household head Cash transfers from other households Household head Property income Household head

15. N ational T ransfer A ccounts Property Income ► Possible components of property income in surveys: interest, rent and dividends; some surveys include property income with non- labor income ► Tabulate the age profile of property income (assigned to household head) for estimating  corporate income tax, and  operating surplus of corporations

16. N ational T ransfer A ccounts V. Smoothing ► Visually check if the beginning and ending of the smoothed and unsmoothed age profiles are different ► Not over-smoothing: measure percentage errors between smoothed and unsmoothed profiles; choose span or bandwidth that yields the least percentage error between the two

17. N ational T ransfer A ccounts Some Rules for Smoothing ► Smooth and aggregate: smooth components of the age profiles and aggregate them up, i.e. smooth earnings and labor’s share of self- employed income and add them up to measure the age profile of labor income ► Do not smooth public and private education age profiles ► Use unsmoothed health consumption for newborns because it is usual to have high health consumption at this age

18. N ational T ransfer A ccounts Rules for Smoothing (cont.) ► Income, income taxes and familial transfer outflows: begin smoothing from the adults, excluding those younger age group who do not earn income.  However, problem arises when some beginning age group may appear to have negative values for these variables.  This could be solved by replacing the negative by the unsmoothed values for the beginning age group.

19. N ational T ransfer A ccounts Smoothed education consumption could eliminate age specific education consumption, i.e., primary school and college education expenses

20. N ational T ransfer A ccounts Different spans yield different results: always check for the variations among young and old ages Use unsmoothed health consumption for newborns

21. N ational T ransfer A ccounts Lower spans cause lower percentage difference between smoothed and unsmoothed age profiles than higher spans

22. N ational T ransfer A ccounts Conclusions ► It is important to examine demographic characteristics, particularly education and health, reported in the surveys ► Need to cleanup data set to avoid or detect data problem, which could cause serious mistakes while estimating age profiles for NTA ► Avoid including non-consumption expenditure while estimating consumption age profile ► Labor income is assigned to individuals while asset income and transfer income is assigned to head ► Choose appropriate span or bandwidth that causes the least variation between smoothed and unsmoothed age profiles