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The distributional
effects of income tax
expenditures
Silvia Avram
Holly Sutherland
ECFIN Taxation Workshop,
Brussels, 23rd October 2013
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Motivation
Definitions and terms
Methodology
Results
Total tax allowances & credits
By type
Caveats and conclusions
Outline
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Why tax expenditure?
Important element of income taxation systems
Total forgone revenues may be substantial
Distributional effects less well understood
Previous work:
measures and decomposition of the progressivity of the tax
system (Kakwani, 1977; Wagstaff et al., 1999; Wagstaff and Van
Doorsaler, 2001; Verbist, 2004)
US studies specific methodology and results (Toder et al.,
2009; Althuler and Dietz, 2011)
Not able to fully capture the interaction between the various
elements of the tax system (ex: tax concessions affect the ATR)
Not able to capture the interactions with the larger T-B system
Not able to differentiate instruments by their design
Motivation
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Tax expenditure
=tax concessions, tax advantages
=provisions that decrease the net tax liability for some taxpayers
include general tax instruments / 0 band rates not distribution
neutral
Include provisions that may be classed as measurement of
“ability to pay”
Distinguish between:
Tax allowances= reductions in taxable income
Tax credits= reductions in the initial tax liability
Non-taxable income & special rates not covered
Deferred liability treated as an allowance
Definitions and terms
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EUROMOD-simulation of income tax
simulation of entitlements based on household and individual
characteristics (SILC) and income tax rules (national legislation)
including most tax allowances and tax credits
(not actual payments)
not all tax allowances and credits simulated in EUROMOD
6 countries: CZ, DE, DK, ES, FR, IT
2010 income tax systems
Methodology (I)
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Value of tax concessions (allowances/ credits):
Gross: difference in net tax liability due to tax concessions
(interaction with other elements of the income tax system)
Net: difference in household disposable income due to the tax
concessions (interaction with all other elements of the tax-benefit
system)
Dynamic decomposition elements do not sum to total!
Methodology(II)
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Distinguish between:
General =universal instruments applicable to all tax payers (incl.
0 rate tax bands)
Family= instruments targeted to taxpayers with dependents
(children, spouses, parents etc.)
Vulnerable groups= instruments targeted at taxpayers (or
dependents) perceived to be economically insecure (ex:
disabled, elderly, lone parents etc.)
Income related= instruments inversely correlated with (taxable)
income
Types not exhaustive and not mutually exclusive!
Value calculated the same way as total (i.e. factoring in
the interaction between the various tax concessions)
Methodology(III)
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Size: Annual expenditure on TA &
TC
Source: EUROMOD G 1.0+ & EUROSTAT (for total government revenue)
0,00
20,00
40,00
60,00
80,00
100,00
120,00
140,00
CZ DE DK ES FR IT
Tax expenditure as % of total income tax
Gross TA Net TA Gross TC Net TC
0,00
2,00
4,00
6,00
8,00
10,00
12,00
14,00
16,00
CZ DE DK ES FR IT
Tax expenditure as % gov. revenue
Gross TA Net TA Gross TC Net TC
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Size: Proportion entitled by quintile
Note: Quintiles are based on household equivalised disposable income
when no tax allowances/ credits are present
Source: EUROMOD G1.0
0
20
40
60
80
100
120
All Q1 Q2 Q3 Q4 Q5
Tax allowances
CZ DE DK ES FR IT
0
20
40
60
80
100
120
All Q1 Q2 Q3 Q4 Q5
Tax credits
CZ DE DK ES FR IT
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Concentration Curves 0
.2.4
.6.8
1
Cum
mu
lative a
llow
an
ces s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
CZ
DE
DK
ES
FR
IT
Equality0
.2.4
.6.8
1
Cum
mu
lative c
redits s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
CZ
DE
DK
ES
FR
IT
Equality
Tax allowances Tax Credits
Source: EUROMOD G1.0
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Average TA as % of rank HDI
Note: Quintiles are based on household equivalised disposable income
when no tax allowances/ credits are present
Source: EUROMOD G1.0
0
5
10
15
20
25
All Q1 Q2 Q3 Q4 Q5
Tax allowances-gross
CZ
DE
DK
ES
FR
IT
-5
0
5
10
15
20
25
All Q1 Q2 Q3 Q4 Q5
Tax allowances- net
CZ
DE
DK
ES
FR
IT
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Average TC as % of rank HDI
0
5
10
15
20
25
All Q1 Q2 Q3 Q4 Q5
Tax credits-gross
CZ
DE
DK
ES
FR
IT
0
5
10
15
20
25
All Q1 Q2 Q3 Q4 Q5
Tax credits-net
CZ
DE
DK
ES
FR
IT
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Tax allowances Tax credits
Kakwani
Reynolds-
Smolensky
VE Kakwani Reynolds-
Smolensky
VE
CZ 0.3649 -0.0011 -0.001 -0.0859 0.0056 0.0086
DE 0.1247 -0.0127 -0.0116 - - -
DK -0.033 0.0038 0.0057 - - -
ES 0.0379 -0.0026 -0.0023 -0.0878 0.0078 0.0086
FR -0.0183 0 0.0014 0.0013 0 0
IT 0.1572 -0.0063 -0.006 -0.2842 0.024 0.0243
Progressivity/ redistribution
indices
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General instruments 0
.2.4
.6.8
1
Cum
mu
lative a
llow
an
ces s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
DK
DE
FR
Equality
Concentration curve-General tax
allowances
0.2
.4.6
.81
Cum
mu
lative c
redits s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
CZ
ES
Equality
Concentration curve-General tax
credits
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Family related instruments 0
.2.4
.6.8
1
Cum
mu
lative a
llow
an
ces s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
DK
DE
FR
ES
Equality
0.2
.4.6
.81
Cum
mu
lative c
redits s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
CZ
ES
IT
Equality
Concentration curves-Family tax
allowances Concentration curves-Family tax credits
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Instruments targeted at vulnerable
groups
0.2
.4.6
.81
Cum
mu
lative a
llow
an
ces s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
DE
FR
ES
Equality0
.2.4
.6.8
1
Cum
mu
lative c
redits s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
CZ
FR
ES
IT
Equality
Concentration curves: VG tax
allowances Concentration curves: VG tax credits
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Income related instruments 0
.2.4
.6.8
1
Cum
mu
lative a
llow
an
ces s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
FR
ES
IT
Equality
0.2
.4.6
.81
Cum
mu
lative c
redits s
ha
re
0 .2 .4 .6 .8 1Cummulative income share
CZ
FR
ES
IT
Equality
Concentration curves- IR tax
allowances
Concentration Curves: IR tax credits
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CZ DE DK ES FR IT
K RE K RE K RE K RE K RE K RE
General TA 0.3258 -0.0005 -0.2203 0.0167 -0.1750 0.0022
General TC -0.0093 -0.0011 -0.0272 0.0012
Family TA 0.4013 -0.0005 -0.4960 0.0003 0.0579 -0.0023 -0.5006 0.0010
Family TC -0.2966 0.0063 -0.0437 0.0003 -0.4970 0.0082
VG-TA 0.2130 -0.0004 -0.0549 0.0004 -0.8651 0.0025
VG-TC 0.1773 0.0000 0.0241 -0.0001 0.0013 0.0000 -0.4180 0.0000
IR-TA 0.0529 -0.0019 -0.8651 0.0025 -0.1950 0.0000
IR-TC -0.8247 0.0038 -0.1139 0.0002 0.0013 0.0000 -0.3434 0.0249
Progressivity/ redistribution by type
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Tax expenditure may be sizeable (~10% of gov.
revenue)
Tax allowances generally benefit middle and top more
Tax credits –larger share going to middle and top but
relatively larger at the bottom reducing inequality
Progressivity varies but generally TCs more progressive
than TAs
Some tax instruments can be strongly progressive
Ex: family TAs in DK; family TCs in IT; IR TAs in FR
Impact on inequality –generally small (exception:TC in
IT)
Summary of results (I)
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The more progressive the tax schedule the stronger the
regressive effect of TAs
DE: regressive TAs likely due to the progressivity adjustment
Interaction with the wider TB system can modify impact
FR: TA reducing the income concept used to assess eligibility for
many benefits net effect much stronger than gross at the bottom
Interactions between TAs and TCs reducing one
increase another
Targeting via the tax system
Many IR/ VG instruments progressive but majority proportional
Taxpaying unit and incomes used for targeting may limit
effectiveness
Summary of results (II)
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Simulation limitations:
Not all instruments simulated cross-country comparisons more
valid in the sub-types than in the aggregate
Not considering the impact of exemptions (i.e. whole categories
on income which is not taxed)
Calculations based on theoretical entitlements and liability
limited consideration of tax-evasion (IT only) and non-take-up of
tax advantages
No behavioural effects
Caveats
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Thank you!
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Overview of allowances &
credits
CZ DE DK ES FR IT
Social insurance contributions A A A A A
0 tax bracket / general credit C A A A
Income related A A A A A & C A &C
Expenses (incl. work) A A A & C
Child related (incl. child care) C A C A &C C
Spouse /family members C C C
Mortgage interest A A C C C
Private/ occupational pension contr. A A A A
Alimonies A A A A
Disability C C A & C
Lone parents A
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Comparing to external benchmarks
0,00
1,00
2,00
3,00
4,00
5,00
6,00
7,00
8,00
9,00
CZ DE DK ES FR IT
Tax expenditure as a % of GDP
Tax allowances
OECD-tax allowances
Tax credits
OECD-Tax credits