News and highlights on fiscal policy

HFCS supporting microsimulation modelling via EUROMOD (12-07-2024)

The European Central Bank and the Joint Research Centre (JRC) of the European Commission have signed an agreement to link HFCS data to EUROMOD, the EU tax-benefit microsimulation model maintained by the JRC. EUROMOD is the JRC’s flagship model for calculating the effects of taxes and social benefits on households and work incentives for each EU country and the EU as a whole. 

In recent years the JRC has, in close collaboration with the ECB, been using the HFCS to develop a new extension of EUROMOD. This extension allows economists to generate household-level data on net income after taxes and social benefits using the HFCS survey, and will help us better understand how monetary policy affects household incomes and work incentives.

2024 Annual Report on Taxation published, with contributions from B2 Fiscal Policy Analysis Unit  (10-07-2024)

Last week, DG TAXUD published the 2024 edition of the Annual Report on Taxation (ART), the flagship annual EC publication presenting facts and analysis of the state of play of tax systems and tax policy in the EU. This year’s edition focuses on the development of the tax mix from various perspectives, challenges faced by the different types of taxes, how their design can affect economic agents’ behavior, and the contribution of tax systems to a competitive EU economy.

As in previous years, the ART includes several contributions from the JRC.

In the area of corporate taxation, the fragmentation of the EU tax system remains a significant barrier to cross-border economic activity in the EU Single Market. The current framework, based on 27 national tax systems, is inherently complex, leading to high compliance costs, especially among SMEs, and opportunities for tax avoidance and evasion. JRC research based on the Cortax model shows that tax simplification, consisting of lower tax compliance costs and incentives to expand cross-border, can increase firm productivity and have significant long-term effects on GDP and tax revenues.

In addition, drawing on our EUROMOD model, the report zooms in the fairness aspects of recent reforms of personal income taxation to address inflation in selected Member States (i.e. indexation to inflation mechanism introduced in Austria, changes in the tax brackets and/or tax allowances in Portugal and Lithuania).

Such assessments of the budgetary and distributional impacts of tax-benefit reforms, both at EU and national levels, are key instruments at the disposal of policymakers to fine-tune reform proposals and increase the acceptance of changes in the tax codes.

Beyond informing the policy debate, these inputs contribute to the already close collaboration between JRC and DG TAXUD!

JRC simulation of inheritance taxation in Austria made it to the headlines  (10-07-2024)

The recent report on 'Inheritances in Austria: A Model Estimation of Intergenerational Wealth Transfers up to 2050', co-authored by our colleague GRUNBERGER Klaus in JRC, together with Vienna Chamber of Labour, made it to the headlines in the Austrian newspaper Der Standard and was also discussed in other media.  

The study uses the JRC’s inheritance microsimulation model INTAXMOD to estimate current and future inheritances, shedding light on the potential impact of reintroducing inheritance taxation in Austria. This work also illustrates the way the ageing challenge represents an opportunity to enhance the fairness of tax systems, given that wealth accumulation and wealth transmission are important factors explaining the persistence in income inequality across generations.  

 Key findings of the study: 

 - Doubling of inheritance volume: the annual volume of inheritances is projected to double until the year 2050 in Austria. This is due in part to demographic changes, as particularly high-birth cohorts reach the end of their lives. On the other hand, the cohorts bequeathing their wealth during this period are also relatively wealthy. The increase in inheritance tax revenue is therefore explained by both an increase in the number of inheritance cases and by higher average inheritances. 

 - Concentration of wealth: inheritances are highly concentrated in the upper percentile of the distribution, indicating that the wealthiest segments of the population will continue to receive the largest transfers. 

 - Potential tax revenues: if inheritance taxes were reintroduced in Austria with an exemption threshold of €1 million, only 0.2% of heirs would be affected. Even with a €500,000 exemption, less than 1% of heirs would be affected, yet substantial revenues could be generated. 

 A very interesting application of our JRC modelling tool for the simulation of inheritance taxes! Congrats, Klaus! 

Network on Welfare and Policy in Latin America and the Carribbean (WAPLAC) in San José, Costa Rica (29-05-2024)

Salvador Barrios participated to the first workshop organised by the Network on Welfare and Policy in Latin America and the Carribbean (WAPLAC) in San José, Costa Rica, 9-10 May 2024.  This two-day conference aimed to take stock of recent research on fiscal and welfare policies, inequality, wellbeing, labour market dynamics, support for democracy, and other social outcomes in LAC. 

This event evidenced the growing role of microsimulation models to support public policy decision making. The relevance of the EUROMOD model in this context, both as modelling platform used to develop non-EU models, as it is the case in many Latin American countries, and as a tool extensively used by the European Commission services, was particularly salient. During the roundtable organised at the end of the event, Salvador shared the EU experience on the use of EUROMOD to support policy recommendations and proposals by the European Commission. The discussion highlighted the usefulness of access to administrative data to support social policies and the role microsimulation model can play in terms of designing and assessing these policies when availing of such data. 

The other panel participants included Yorleny León (Minister for Human Development and Social Inclusion, Costa Rica), Roberto Guillén (Vice-Rector, University of Costa Rica) and Lisseth Rodríguez Garita, (Executive director of the Sistema Nacional de Información de Registro Único de Beneficiarios). The talk focused on the role of data, in particular administrative data, models and economic analysis to support social policy making. It was also the occasion to promote the recent completion of the CRiMod model, the tax and social benefits microsimulation model for Costa Rica, which uses the EUROMOD platform and is coordinated by Prof. Luis Vargas Montoya. 

Agreement on Faster and Safer Relief of Excess Withholding Taxes (FASTER) (22-05-2024)

Last week, the EU Council reached agreement on the proposal for a “Faster and Safer Relief of Excess Withholding Taxes (FASTER)” Directive. This is a key initiative to reinforce the Capital Markets Union through more efficient, secure and simplified tax procedures. Under the current rules, in the case of cross-border investments, many Member States levy withholding taxes on dividends and interests paid to investors who live abroad. However, investors must still pay income tax in their country of residence for the same income, and then, to avoid the double taxation, submit a refund claim. These refund procedures are often lengthy, costly and cumbersome, causing frustration for investors and discouraging cross-border investment. The FASTER initiative will make these refund procedures faster, simpler and more harmonised across the EU. 

JRC colleagues Serena Fatica, PYCROFT Jon, STOEHLKER Daniel and STASIO Andrzej supported DG TAXUD in the economic impact assessment of this initiative. The JRC analysis quantified the costs associated with the current procedures and, using econometric methods, showed that investors are highly sensitive to these barriers and that reducing excess withholding taxes can increase cross-border investment. Then, using the CORTAX model, our colleagues provided evidence on how eliminating the costs associated with these refund procedures would lead to an increase in GDP, capital, wages and employment. 

The general approach announced by the Belgian Presidency of the EU Council on the Commission's proposal for the FASTER Directive marks another milestone for the collaboration between the JRC and DG TAXUD on EU tax reforms. 

Celebrating Europe's Day (15-05-2024)

The Centro de Documentación Europea de Córdoba (uco.es) actively promotes teaching and research on the European integration process in the academic world. Last week, on the occassion of Europe's Day, it organised the 33rd European Week, including conferences on key EU topics. 

Our colleague Agundez Ana had the opportunity to discuss with participants on “Single Market and fiscality”, highligting remaining tax barriers and how the JRC.B2 unit has contributed to recent Commission proposals in the area of taxation for a more integrated, competitive and fairer internal market. 

Key role of EUROMOD in the Commission’s initiative for better distributional impact assessments of Member States’ policy reforms (14-02-2024)

In order to promote a more systematic use of distributional impact assessment (DIA) across Member States, the European Commission organises conferences and mutual learning events, which constitute a forum for exchange of practices between national experts.

The ‘8th Mutual Learning Event on DIA: Reflecting on progress and looking ahead’ took place last week in Brussels. The event was organised by DG EMPL and gathered representatives and from almost all Member States, as well as from SPC, EMCO, EPC and the OECD.

PAPINI Andrea set the scene in the working group on “DIA in practice (modelling, access to and use of data)” and LEVENTI Chrysa participated in the working group on “Evidence-driven design of benefits (examples of DIA for tax-benefit reforms)”. EUROMOD was widely mentioned and promoted as the reference model for assessing the distributional effects of tax and benefit policies. Participants from Member States in which DIAs are still not performed showed a great interest in learning more about the model and participating in future EUROMOD trainings.

Collaboration JRC and UNU-WIDER (29-11-2023)

Collaboration between the JRC and the UNU-WIDER The JRC has concluded an important Collaborative Research Arrangement with the United Nations University World Institute for Development Economics Research (UNU-WIDER) that will further extend the geographical reach of the EUROMOD Microsimulation maintained by JRC and UNU-WIDER’s flagship SOUTHMOD project aims to develop and promote tax-benefit microsimulation models in the Global South. Building on the successful EUROMOD platform, SOUTHMOD facilitates rigorous policy analysis and fosters evidence-based decision-making in the developing world. 

This collaboration will focus on further expanding the understanding of taxes and social policies in developing countries, strengthening technical capabilities in microsimulation modelling and related software development. It will notably facilitate the fiscal and distributional assessment of policy reforms in order to help governments design policies that reduce poverty, inequality, and ensure sustainable economic growth. 

Spanish newspapers on “Inflation, fiscal policy and inequality” (22-11-2023)

Top Spanish newspapers (now El Mundo again) continue referring to the results of the joint JRC-ECB study on “Inflation, fiscal policy and inequality”. 

Speech about Distributional Impact Assessment (DIAs) at the European Social Forum (22-11-2023)

BARRIOS Salvador spoke about the role of Distributional Impact Assessment (DIAs) at the European Social Forum that took place on the 16-17/11 in Brussels. Given that the Twin transition is expected to have a profound impact on the way our economy and society function, it is paramount to consider its distributional dimension upfront, leaving “no one behind” President Von Der Leyen own words. 

In the coming years Member States will adopt reforms in order to meet ambitious environmental targets. These policies could potentially have significant distributive impacts and affect more particularly those at the lower end of the income distribution. The JRC, together with DG EMPL and DG REFORM, is actively promoting the use of DIAs in order for the Member States to systematically address these concerns.

The EUROMOD model maintained by the Joint Research Centre plays a key role in this context, given that it provides a common platform for carrying out DIAs and promoting the dialogue between the Commission and the Member States in the area of tax (including green) and social reforms.

Spanish newspapers on “Inflation, fiscal policy and inequality” (08-11-2023)

Top Spanish newspapers (now El País and El Mundo) continue referring to the results of the joint JRC-ECB study on “Inflation, fiscal policy and inequality” recently published as ECB Occasional Paper co-authored by colleagues AMORES Antonio F , DE AGOSTINI Paola, Silvia [dot] DE-POLIec [dot] europa [dot] eu (DE POLI Silvia ), MAIER Sofía and RICCI Mattia. The study focuses on the effect of inflation on households’ welfare and on the role of policies to cushion its impact in selected Euro countries (Germany, France, Spain, Italy, Greece and Portugal). 

EDGE-M3 pension model presentation at the US National Tax Association in Denver (01-11-2023)

The EDGE-M3 pension model was presented by colleague FERNÁNDEZ BASTIDAS Rocío, at the 116th Annual Conference of the National Tax Association  in Denver, November 2-4. She presented “Heterogeneous Effects of Pension Reforms in the EU: A General Equilibrium Perspective” as part of a session on Pension Policy in Lifecycle Models, which featured academics from various US universities and the Joint Committee on Taxation of the US Congress.

EUROMOD Annual Meeting and Research Workshop (22-09-2023)

The EUROMOD Annual Meeting and Research Workshop took place on 20-22 September in JRC-Seville. The event, organised by JRC, brought together EUROMOD practitioners from all over the EU, who discussed about the future of the model and the state-of-the-art research performed with it.

Ongoing collaboration with European Central Bank (ECB) (09-2023)

The ECB and JRC are currently preparing a collaboration agreement in order to foster the use of EUROMOD using the Households Finance and Consumption Survey collected by the ECB, the national central banks of the Eurosystem and a number of national statistical institutes. The ECB and national central banks have expressed strong interest in developing the use of EUROMOD using this data. The ECB and JRC have also recently collaborated on a joint study in order to assess the impact of anti-inflationary measures, to be published soon by the ECB.  (including green) and social reforms.

Presentation at ECB (20-09-2023)

BARRIOS Salvador presented JRC activities on costing of fiscal reforms using the EUROMOD model at the 4th Joint Workshop of European Independent Fiscal Institutions and the European System of Central Banks (ESCB). The workshop, entitled “European fiscal policy and governance reform in uncertain times”, was organised at the European Central Bank premises in Frankfurt. Fabio Panetta, Member of the Executive ECB´s Board, made the introductory speech of this event.