who bears the burden? - european...

*

Salvador Barrios

JRC-B2

04 July 2016

Joint Research Centrethe European Commission's in-house science service

Disclaimer: The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of any affiliated institution.

EcoMod Conference 5th July 2017

Jonathan PycroftMagdalena Zachłod-Jelec

Who bears the burden?Tax strategies to reduce

long-term debt in Italy

An overlapping generations

model approach

*

* Motivation for model

* Model structure

* Baseline descriptive statistics

* Simulations

* Public debt ↓ by

i. Wage tax ↑

ii. Consumption tax ↑

… over 20 or 40 years

* Future developments

*

Missing tool for fiscal policy analysis?

Joint Committee on Taxation (USA)

European Commission

DSGE Yes Yes

Macro-forecasting Yes Yes*

Overlapping generations Yes No

* Long-run dynamic impact

* Intergenerational impact

* Microsimulation link (EUROMOD): Dynamic scoring

*

*Key features of model:

* 7 generations = individuals in their 20s, 30s, 40s … 80s

* 4 working (20s–50s); 1 part-retired (60s); 2 retired (70s – 80s)

* "Born" in 20s; one time period = 10 years

* Individuals choose consumption & savings & leisure

* … to optimise over their lifetime with perfect foresight

*Endogenous labour supply (voluntary unemployment)

* 1 good

* 1 country = Italy (fixed external balance)

* 3 taxes (wage, consumption, capital); govt transfers

*Intertemporal optimisation

*

Time period

G120s

G230s

G340s

G450s

G560s

G670s

G780s

T1 t1,g1

T2 t2,g2

T3 t3,g3

T4 t4,g4

T5 t5,g5

T6 t6,g6

T7 t7,g1 t7,g2 t7,g3 t7,g4 t7,g5 t7,g6 t7,g7

T8 t8,g1 t8,g2

T9 t9,g2 t9,g3

T10 t10,g3 t10,g4

T11 t11,g4 t11,g5

T12 t12,g5 t12,g6

T13 t13,g6 t13,g7

T14 t14,g7

INITIALTIME PERIOD

*Intra- & Intertemporal optimisation

*Utility: time-separable CES function

*

� � 11 � 1

�

��,� �

� � �� ,� �

�

� ��

�

� 11 � � ��,��

� � � �� ,��

� �

� ��

�

� 11 � � � ��,��

� � � �� ,��

� �

� ��

� ⋯�

� 11 � � � �� ,�

� � � �� ,�

� �

� ��

where: � – lifetime utility (time−separable), ��,� – consumption level by generation at time

t, ��,� – leisure level by generation at time t, � – discount rate, � – intertemporal

elasticity of substitution, � – intratemporal elasticity of substitution, �� – preference

parameter for leisure.

*Household budget constraint

1 � � !� ∗ ��,� �∆%� & ,�& �1 � ' !� � �� ∗ ()*+ ∗ �),∗ -.�∗ 1 � ��,� � �/� ∗1 � 0 !� ∗ %� ,� � 1 � ' !� ∗ .+��,� � 1 23��4+�,� �

3��4+�5/�6,� � �789_*,�

;<=>?@ABC<= � DEFC=G>� HEGI> � JIB?J=K>>IB> � LJE=>MIJ>

*

*Intertemporal optimal consumption path: Euler equation

��& ,�& ��,�

� 1 � �/� & 1 � 0 !�1 � �

1 � � !�1 � � !�&

�

;<=>?@ABC<=NIOBPIJC<Q;<=>?@ABC<=LRC>PIJC<Q � NIBJIB?J=<=>EFC=G>

LC@IAJIMIJI=SIT

*

*Government budget balance

U .�9,� ∗ ' !� � �� ∗ ()*+ ∗ �),∗ -.� ∗ V1 � ��,�W�� !� ∗ ��,� � 0 !� ∗ �/� ∗ %� ,��

�

∆4��6& � X�Y� � �/� ∗ 4��6 ��U .�9,� ∗ .+��,� � 1 23��4�Z,� � 3��4�Z5/�6,� � �789_*,�

�

LEO[IFI=?I> � ∆\I]B � ^<FBDAI=QC=G � \I]BDIJF � LJE=>MIJ>

*

*Cobb-Douglas production function

_ � %. �a5 �a

*Demand for production factors (FOCs for a producer

optimization problem)

56+8 ∗ b+� �∝∗ _ ∗ ._�6+8 ∗ ()*+ � 1 �∝ ∗ _ ∗ ._

*

*

G120s

G230s

G340s

G450s

G560s

G670s

G780s

Consumption 6.8 9.7 13.9 19.7 28.1 40.1 57.1

Labour income 9.8 14.0 16.6 19.0 5.7 0 0

*Consumption & Income over life cycle (€bn)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

20s 30s 40s 50s 60s 70s 80s

Consumption Labour income

*

G120s

G230s

G340s

G450s

G560s

G670s

G780s

Consumption 6.8 9.7 13.9 19.7 28.1 40.1 57.1

Labour income 9.8 14.0 16.6 19.0 5.7 0 0

Transfers (inc. pens) 5.7 5.7 5.7 5.7 9.1 9.1 9.1


0.0

10.0

20.0

30.0

40.0

50.0

60.0

20s 30s 40s 50s 60s 70s 80s

Consumption Labour income Transfers (inc. pens)

*

G120s

G230s

G340s

G450s

G560s

G670s

G780s

Consumption 6.8 9.7 13.9 19.7 28.1 40.1 57.1

Labour income 9.8 14.0 16.6 19.0 5.7 0 0

Transfers (inc. pens) 5.7 5.7 5.7 5.7 9.1 9.1 9.1

Capital income 0 2.4 7.1 13.8 22.7 25.4 18.7

Assets 0 3.7 11.2 21.7 35.6 39.9 29.3


0.0

10.0

20.0

30.0

40.0

50.0

60.0

20s 30s 40s 50s 60s 70s 80s

Consumption Labour income Capital income Transfers (inc. pens) Assets

*

Public debt in Italy

Reduce public debt by

Over 20 years Over 40 years

Wage tax wageTax-20yrs wageTax-40yrs

Consumption tax conTax-20yrs conTax-40yrs

131% GDP(2014)

60% GDPStability & growth

pact limit

*

*Shock imposed € 2.13 trillion � € 0.97 trillion

0

0.5

1

1.5

2

2.5

t1 t2 t3 t4 t5 t6 t7 t8 t9 t10 t11 t12 t13 t14 t15 t16 t17 t18 t19 t20 t21 t22 t23 t24 t25 t26 t27 t28 t29 t30

Public D

ebt

€tr

illion

20-years 40-years

*

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35


conTax-20yrs conTax-40yrs

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35


wageTax-20yrs wageTax-40yrs

*

-20

-15

-10

-5

0

5

10

15

20

25

30

35


g20s g30s g40s g50s g60s g70s g80s

-20

-15

-10

-5

0

5

10

15

20

25

30

35


t1 t2 t3 t4 t5 t6 t7 t8 t9 t10 t11 t12

t13 t14 t15 t16 t17 t18 t19 t20 t21 t22 t23 t24

*

Consumption (% change from base)

-15

-10

-5

0

5

10

15

20

25

30

35



-15

-10

-5

0

5

10

15

20

25

30

35


t1 t2 t3 t4 t5 t6 t7 t8 t9 t10 t11 t12

t13 t14 t15 t16 t17 t18 t19 t20 t21 t22 t23 t24

*


-10

-5

0

5

10

15

20


t1 t2 t3 t4 t5 t6 t7 t8 t9 t10 t11 t12

t13 t14 t15 t16 t17 t18 t19 t20 t21 t22 t23 t24

-10

-5

0

5

10

15

20



*


-10

-5

0

5

10

15

20


t1 t2 t3 t4 t5 t6 t7 t8 t9 t10 t11 t12

t13 t14 t15 t16 t17 t18 t19 t20 t21 t22 t23 t24

*


-10

-5

0

5

10

15

20


Consumption by generations


*

Utility

14.4

14.6

14.8

15

15.2

15.4

15.6

15.8

16

t1 n

/a

t2 8

0s

t3 7

0s

t4 6

0s

t5 5

0s

t6 4

0s

t7 3

0s

t8 2

0s

t9 1

0s

t10 0

0s

t11 -

10s

t12 -

20s

t13 -

30s

t14 -

40s

t15 -

50s

t16 -

60s

t17 -

70s

t18 -

80s

t19 -

90s

t20 -

100s

t21 -

110s

t22 -

120s

t23 -

130s

t24 -

140s

Birth period & Age in t8

wageTax-20yrs

*

Utility

14.4

14.6

14.8

15

15.2

15.4

15.6

15.8

16

t1 n

/a

t2 8

0s

t3 7

0s

t4 6

0s

t5 5

0s

t6 4

0s

t7 3

0s

t8 2

0s

t9 1

0s

t10 0

0s

t11 -

10s

t12 -

20s

t13 -

30s

t14 -

40s

t15 -

50s

t16 -

60s

t17 -

70s

t18 -

80s

t19 -

90s

t20 -

100s

t21 -

110s

t22 -

120s

t23 -

130s

t24 -

140s


wageTax-20yrs wageTax-40yrs

*

Utility

14.4

14.6

14.8

15

15.2

15.4

15.6

15.8

16

t1 n

/a

t2 8

0s

t3 7

0s

t4 6

0s

t5 5

0s

t6 4

0s

t7 3

0s

t8 2

0s

t9 1

0s

t10 0

0s

t11 -

10s

t12 -

20s

t13 -

30s

t14 -

40s

t15 -

50s

t16 -

60s

t17 -

70s

t18 -

80s

t19 -

90s

t20 -

100s

t21 -

110s

t22 -

120s

t23 -

130s

t24 -

140s


wageTax-20yrs conTax-20yrs

* Working with OG-USA team (Jason Debacker, Rick Evans)

* GAMS � Python

* Model features

* Bequests

* Heterogeneous abilities (income quantiles)

* Demographics (fertility, mortality, migration)

* Tax functions

* More EU countries: 27?

*

*Burden falls on middle-aged

*esp. 40s & 50s when shock implemented

*Unborn benefit from paying off debt, but also young

*(20s & 30s when shock implemented)

*If 40 years, middle-aged better off, young worse off

*… relative to 20 years

*Consumption tax better for middle-aged,

*than wage tax; shares the burden more broadly

*Consumption tax worse in long run

*Higher benefit from reducing wage tax

*

*

Utility

14.4

14.6

14.8

15

15.2

15.4

15.6

15.8

16

t1 n

/a

t2 8

0s

t3 7

0s

t4 6

0s

t5 5

0s

t6 4

0s

t7 3

0s

t8 2

0s

t9 1

0s

t10 0

0s

t11 -

10s

t12 -

20s

t13 -

30s

t14 -

40s

t15 -

50s

t16 -

60s

t17 -

70s

t18 -

80s

t19 -

90s

t20 -

100s

t21 -

110s

t22 -

120s

t23 -

130s

t24 -

140s


wageTax-20yrs conTax-20yrs wageTax-40yrs conTax-40yrs

*

Using microdata to produce a surface for labour and capital income tax liability

Using demographic data to anticipate current and future populations: fertility (top left) andtotal of fertility, mortality and migration tending to steady state (right)

*

*

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

t1 t3 t5 t7 t9 t11 t13 t15 t17 t19 t21 t23 t25 t27 t29

Labour supply Labour demand Capital demand

*

-1.5

-1

-0.5

0

0.5

1

1.5

2


Consumption tax rate PIT rate Government revenues

*

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2


Gross wage Net wage Interest Rate

*

-2

-1.5

-1

-0.5

0

0.5

1

1.5


Consumption by generations


who bears the burden? - european...

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