Title: Identifying Policy Impacts in the Crisis: Microsimulation Evidence on Tax and Welfare
Abstract: 1. INTRODUCTION Household incomes in Ireland have been hit hard by a succession of adverse factors during recent years. The ending of the property bubble, an unparalleled banking crisis, a global recession, and a fiscal crisis have led to a severe downturn in national income and a sharp rise in unemployment. Policy adjustments have included reductions in government expenditure and increases in a range of taxes and charges. In this paper we focus in particular on how income tax (broadly defined) and welfare policies have changed over the period, and how they have shaped the distributive impact of policies designed to adjust to the new economic circumstances. Broader questions about the impact of expenditure adjustments are also of interest, but a recent study of this topic (O'Dea and Preston, 2011) suggests distinct limits on how well these can be identified. We have already undertaken some work on identifying the distributive impact of tax and welfare policy (e.g., Callan et al., 2011, 2012). In identifying policy effects, we must hold other things constant, and simulate the impact of policy under baseline and reform scenarios. To do this we must use a tax-benefit model. We have already described the construction of SWITCH, the ESRI tax-benefit model, based on 2008 data. (Callan et al, 2010). This is the model which has been used in analysing the impact of austerity policies over the 2008 to 2012 period in a series of papers. There have been enormous changes in incomes and in unemployment rates over this period. The database underlying the SWITCH model is adjusted to take account of such changes, by uprating (or downrating) incomes, and by reweighting to take account of changes such as the increase in unemployment. In normal times, these techniques work well to produce a good representation of the population. How well do such techniques perform in the much more demanding environment of the Great Recession? In order to examine this question, and to provide a more up-to-date database for modelling of tax and welfare policies, we have created a tax-benefit model database using the CSO's Survey on Income and Living Conditions (SILC) 2010. Section 2 describes some of the reasons for adopting a tax-benefit modelling approach, focusing in particular on the measurement of financial incentives to work. Section 3 outlines the challenges faced in constructing this database and the procedures adopted. Section 4 documents the cross-checks on this database from external sources. Section 5 considers the distributive impact of policy over the whole crisis period, and the extent to which the data adjustment strategy can help to provide useful results until new data become available. Section 6 deals with measurement of replacement rates, one of the key measures of work incentives. Section 7 draws together the conclusions from work to date, and outlines some key areas for future research (housing costs, housing assistance payment, lone parents etc.) 2. MODELLING TAX AND WELFARE POLICY OPTIONS While are easily constructed, and the calculations for such families are relatively easy to understand, this approach has very severe limitations, which are not always recognised. The major difficulty is that it is impossible to build up a picture of how real households are affected by policy changes using a small or even quite large--number of hypothetical examples. Once calculations for a set of example households are undertaken, there is an implicit assumption that real households can be represented by the set of hypothetical households chosen. Two examples serve to illustrate this point. First, a note by the Department of Finance (2009) sets out calculations of replacement rates for a range of circumstances. Three earnings levels were considered (the minimum wage, % of the average industrial wage and the average industrial wage) and a range of family types: single, married without children, married with one or two children or lone parent. …
Publication Year: 2012
Publication Date: 2012-01-01
Language: en
Type: article
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Cited By Count: 8
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