Transcript Research on redistributive effects of Croatian fiscal system

Research on redistributive
effects of Croatian fiscal
system
Ivica Urban
Institute of Public Finance
Distribution of fiscal burdens
and benefits in Croatia
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Only partially investigated
Distribution of PIT analyzed in several
studies
Distribution of VAT
Influence of social benefits on income
inequality
Distribution of fiscal burdens
and benefits in Croatia
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No attempt to provide combined
incidence calculation for several tax
and benefit instruments
Income inequality in Croatia
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World Bank (2006), Nestić (2005),
World Bank (2001)
Disposable income inequality in
Croatia is low in comparison with other
transition countries
What is the influence of government
on distribution of income?
Theses for research
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Government redistributive policies are one
of the prime determinants of disposable
income inequality in Croatia
The largest part of income redistribution
process is achieved through the public
pension system
Fiscal instruments are highly efficient in
reducing inequality (well-targeted and
introducing low horizontal inequalities)
“Inequality” studies
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Kesselman & Cheung (2004): Tax
Incidence, Progressivity, and Inequality
in Canada
Computable general equilibrium (CGE)
Fiscal incidence (FINC)
and Inequality (INEQ) studies: analyze
single tax forms or groups of taxes
and/or benefits
“Inequality” studies
Assumptions (deficiencies, restrictions,
problems with...)
a) inclusion only of direct taxes and benefits in
analysis; exclusion of indirect taxes and inkind government benefits,
b) income earners cannot shift the burden of
personal taxes,
c) existence of taxes and transfers does not
affect market incomes,
d) annual instead of lifetime perspective
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“Inequality” studies: examples
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Kim & Lambert (2007): Redistributive
Effect of US Taxes and Public
Transfers, 1994-2004
Immervoll et al. (2005): Household
incomes and redistribution in the
European Union: quantifying the
equalising properties of taxes and
benefits
Methodology
RE = Redistributive effect
Lambert (1986, 2001):
RE  GX  GN  V  R
m
n
 g   b 
i
V = Vertical effect
V  GX  DN
V
i
T
i 1
j
j
B
j 1
1 g  b
R = Reranking effect
R  GN  DN
Immervoll et al. (2005):
GN Ti  GN
GN  B j  GN
 T = Kakwani progressivity index of taxes
 B = Kakwani regressivity index of benefits
DN = Concentration coefficient of post-fiscal income
GX = Gini coefficient of pre-fiscal income
GN = Gini coefficient of post-fiscal income
Alternative approaches
Methods:
1. Lambert (1986) – Decomposition of vertical effect
2. Immervoll et al. (2005) – “Exclusion” of one-by-one instrument
from the reference base
Reference income base:
1. Pre-TB income
2. Post-TB income
A
B
C
D
Method:
Decomposition
of vertical
effect
Exclusion of
one-by-one
instrument
from the base
Decomposition
of vertical
effect
Exclusion of
one-by-one
instrument
from the base
Reference income:
Pre-TB
Pre-TB
Post-TB
Post-TB
Equivalent incomes
yi  Yi / ei
ei  0.5  0.5  adultsi 0.3  childreni
Defining groups of households
Type
Characterization
Fully employed
Mixed
Workless
Elder only
EM  0, UN  0, EL  0
EM  0, UN  0, EL  0
EM  0, UN  0, EL  0
EM  0, UN  0, EL  0
Equivalent units
in 2005 (%)
33.5
32.5
16.2
17.8
EM = employed or self-employed, UN = unemployed or inactive; EL = the elder
Distribution of income, taxes
and benefits in 2005 (1)
100
PIT
90
80
SSC
70
60
Non means-tested
benefits
50
40
Means-tested
benefits
30
20
Pensions (<65)
10
0
Pensions (65&>)
-10
-20
Total market
income (after tax)
-30
-40
-50
Fully employed
Mixed
Workless
Elder only
Distribution of income, taxes
and benefits in 2005 (2)
1.0
0.9
Non means-tested
benefits
0.8
Means-tested
benefits
0.7
Pensions (<65)
0.6
Pensions (65&>)
0.5
0.4
Other (periodic)
private income
0.3
Non-taxable market
income
0.2
Taxable market
income (after tax)
0.1
0.0
Fully employed
Mixed
Workless
Elder only
Entropy index decomposition
0,7
0,6
Entropy index
0,5
Inequality
0,4
Within-group
Between-group
0,3
0,2
0,1
0,0
Pre-TB
Post-TB
  0 .5
Pre-TB
Post-TB
  2.0
Distribution of income, taxes
and benefits in 2005 (3)
60
Pre-TB income
70
Disposable income
SSC and PIT
51
40
36
26
23
20
16 16
13
10
12
60
50
39
40
30
24
20
20
13 12
10
6
0.4
0.5
9
6
3
0
0
1
Percent of the total
Percent of the total
50
30
Pensions and benefits
60
2
3
Quintile groups
4
5
1
2
3
Quintile groups
4
5
Inequality measures
0.8
RE+R+DN=GX
R+DN=GN
0.6
RE
0.4
R
0.2
DN
0.0
  1 .5
 2
 3
Reference income base
Decomposition of
redistributive effect
Pre-TB
Post-TB
0.0
0.2
0.4
0.6
0.8
Contribution
Pens(65&>)
FamSuppA
Pens(<65)
SSC-PensF
PIT
SSC-HealthF
Child A
Other
1.0
Preliminary conclusions
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Croatian system of direct taxes,
pensions and social benefits seems to
be highly redistributive
Public pensions are the most
contributive instrument, followed by
SSC and PIT
Unfinished research, still lot to do
Fiscal system coverage
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PIT and SSC = 38% of total general
government revenue
Public pensions and cash benefits =
34% of total expenditures (2006)
Huge part of fiscal system is still
outside the coverage of this analysis
Further issues (1)
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How does Croatian fiscal system stand in
comparison with EU countries in terms of
achieving equity goals?
Are the individual instruments and the
system as a whole enough redistributive?
Are there some instruments that are not
equitable? Should taxes be more
progressive?
Can the overall redistributive effect be
significantly altered through increase
(decrease) of the PIT rate schedule
progressivity?
Further issues (2)
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How can total welfare be increased keeping
the amount of expenditures and taxes
unchanged?
What equity role have public pensions now,
and how it should be in future?
How can other fiscal instruments be
included into current model to obtain more
comprehensive picture of fiscal incidence?