Smoothing Asymmetric Shocks vs. Redistribution in the Euro Area: A simple proposal for dealing with mistrust in the euro area

Transcription

1 Heikki Oksanen Date: Published online 23 March 2016 at Technical appendix to the paper Smoothing Asymmetric Shocks vs. Redistribution in the Euro Area: A simple proposal for dealing with mistrust in the euro area published as CESifo Working Paper No 5817, March 2016, and forthcoming in CESifo Economic Studies special issue on Fiscal Union in 2016, at This Technical appendix provides additional graphs and tables to some of its sections. Section 3.1 A linear negative income tax schedule Figure TA.3.1. Negative income tax for pure transfers 200 Pure transfer system Income level, average = 100 tax payment, net average net tax rate, % disposable income 45 degree line Legend: Taxable income on horizontal axis, average income = 100. Tax payment and disposable income measured as percentages of average income. The graph illustrates pure redistribution according to income level, without the common expenditure that is financed from proportional taxes in Figure 3.1. in the main text. The negative income tax schedule imposes a negative tax on low income level entities, i.e. they receive a transfer determined by their income level. The marginal tax rate is set at 20 % of income. The tax schedule can be specified as providing a transfer to each agent equal to 20 % of the average income so that each agent pays a tax equal to 20 % of its income. For example, for an agent at an income level of 100 the two cancel

2 out (as in this basic case there are no other public expenditures or taxes). The agents at an income level of less than 100 receive a net transfer, while those above pay a net contribution. The budget of the central authority is in balance when the constant component is the opposite number of average income multiplied by the marginal tax rate. The line for the tax payment crosses the vertical axis at the point where an entity with zero income receives a transfer equal to the average income multiplied by the marginal tax rate, which is in this case a transfer of 20 units. The graph also shows the average tax rate. It goes to minus infinity for the entity with zero income and approaches the marginal tax rate for high incomes. The graph also shows disposable income, and illustrates that the system transfers money to those below the average factor income level and takes a positive tax from those above.

3 Section 3.2 Examples of redistribution and smoothing Table TA.3.1 Regional redistribution by negative income tax a. German reunification Assumptions on policy marginal tax rate: 40 % common public expenditure, % of income: 20 % Assumptions on regions Results Region, state or country population income before tax, % average tax rate, % transfer (-) as % of factor income [1] income after tax change in income [2] equalisation in % [3] % -16.0% 66.7% % % 2.0% 108.3% % total or average % % 10%.. Legend: Common public expenditure is financed from proportional tax on income. [1] pure transfer component of tax; minus sign means a transfer received [2] change in income position due to the transfer, in percentage points [3] change in income position due to the transfer as percentage of deviation from average before tax b. MacDougall EU Assumptions on policy marginal tax rate: 15 % common public expenditure, % of income: 2.5 % Assumptions on regions Results Region, state or country population income before tax, % average tax rate transfer (-) as % of factor income [1] income after tax change in income [2] equalisation in % [3] % -8.3% 65.2% % % % 104.1% - 13% % 2.6% 122.4% % total or average % % 10%.. Legend: see above. In the main text we present two reference cases on redistribution and smoothing asymmetric shocks, one for the US and the other for an EU welfare state following stylised data in the MacDougall report of In Table TA.3.1 we have two additional cases. In the first panel (a) we have a stylised case resembling German reunification in In German reunification in 1990 the various transfer mechanisms were extended to the eastern Länder which at the time had an income level of around half of the western part and 25 % of its population. With common public expenditure at 20 % of GDP and a marginal tax rate of for the negative income tax we arrive at a net transfer from West to East which is 16 % of factor income in the East and 2 %

4 of the one in the West. The estimates for the annual transfer from the federal government after the reunification are about 35 % and 4 %, respectively. 1 This means that our simple negative income tax calculation seems to contain half of the net transfer but the other half is like in the US and the EU welfare state not directly linked to the income level at least in the short term, but based on some other economic indicators in this case they could have been linked, for example, to unemployment or some infrastructure investment. The second panel (b) in Table TA.3.1 is inspired by the MacDougall Report of The group took the view that a budget of at least 5-7 % of GDP (7½-10 % if defence is included) is required for a monetary union, and some members felt unable to be so confident that [a monetary union with such a budget] would in practice be feasible and sustainable (Commission of the EC, 1977, 20-21). The reasoning for a significant budget was largely based on the view that redistribution which evens out 30 % of income disparities is required for a successful monetary union, while smoothing the shortterm shocks was desired but it was for the group only of secondary importance. The pre-federal Community budget of 2-2½ % of GDP was for the group only a preparatory stage but clearly insufficient for the monetary union. The table presents a calculation that barely goes half way of the minimum budget for the MacDougall group. The common expenditure is assumed to be 2.5 % of GDP and a negative income tax with a marginal tax rate of 15 % works for redistribution and smoothing of shocks. This schedule means that the member states having 60 % of the average income level receive a transfer equivalent to 8.3 % of their GDP, and the cost to the others is 2.6 of their GDP depending on their income level (the average for Regions 2 and 3 is 1.1 %). This mechanism closes about 13 % of income disparities, much less than the MacDougall group wanted to see. If, as the group wanted, transfers were directed specifically to support the less advanced member states, they could have a stronger impact. From the perspective of the present paper this would happen, like in the existing transfer systems, at the expense of a lower degree of short-term smoothing for the participants in the monetary union as a whole. 1 Source: referring to Ghaussy and Schäfer,The Economics of German unification (1993) p 41.

5 Rev from cohesion, % of GNI Section 4.2 The current EU budget In the main text in Figure 4.1 (a) we present the net contribution to the EU budget by member states by their income level. In Figure TA.4.1 we give their revenues from the EU cohesion policies (cohesion fund, regional and structural funds), and in the second panel (b) revenue from agricultural policies. The two graphs show that most of the net revenue for the less advanced member states comes from the cohesion fund and the regional and structural funds. For them, revenue from agricultural policies adds roughly half more, but for the member states as a whole expenditure for agriculture has a smaller equalising effect on income levels (total EU expenditure for agriculture was in still more than expenditure from regional and structural funds; in 2013 these two expenditure items were nearly equal). a. Revenue from EU cohesion policies as per cent of GNI GNI PPS per head, EU-28 = 100

6 Rev from agr policies, % of GNI b. Revenue from EU agricultural policies as per cent of GNI GNI PPS per head, EU-28 = 100 Legend: income levels: averages in in PPS; contribution to and revenue from EU budget: averages in Sources: European Commission, AMECO: Report 2013 for EU budget revenues and expenditures by member state: The data in Figure 4.1 (main text) and Figure TA.4.1: net contrib % net contrib % Income level cohesion rev % agric rev % Income level cohesion rev % agric rev % BG ES RO IT LV FR PL UK HU IE LT FI EE BE SK DE CZ DK PT AT EL SE MT NL SI LU CY

7 Note to Figure 4.2 in the main text: The graph gives the income level and net contribution to the EU budget by member states according to simple negative net contribution formula, % of GNI in PPS. The formula for calculating the hypothetical redistribution is based on the data on total income, per capita income and size of the population. The simple model described in section 3 gives a precise balance of the mechanism if these data were fully consistent. It turns out that this is not exactly so for the European Commission AMECO data for some (unknown but understandable) reasons related to definitions and data collection. The inconsistency is overcome in the illustration in Figure 4.2 by replacing the population data by the size of the population derived from total income and per capita income series. The result is then an exact balance of the hypothetical transfer mechanism as its logic implies. Section 5.1 A mechanism based on output gaps Figure TA.5.1 gives the output gap for EUR-12 as it is the reference for the output gap for each member state. We have there also the GDP growth rate for comparison. Figure TA.5.1 EUR-12 output gap, % of GDP and GDP growth rate, % EUR-12 output gap EUR-12 growth rate

8 Figure TA.5.2 The transfers implied by the proposed mechanism for eight EUR-12 members Italy 0.8 Netherlands Belgium 1.2 Austria Finland Ireland Portugal Luxembourg Legend: is the annual transfer based on the output gap in each year. Correction transfer is the constant payment or revenue over the seven years covering the cumulative transfer received or paid in the previous seven-year period.

9 Legend (continued): Ropg payment to the mechanism has + sign, and revenue from it has - sign; the graphs show the based on the real time output gap for each country; the has + sign when the country receives a transfer for recovering a positive cumulative Ropg payment in the previous 7-year period, and vice versa; when the bars are on opposite sides of zero, the correction component amplifies the effect of the first component; when they are on the same side, the correction neutralises it partly or fully. The graphs for four EU-12 members (Germany, France, Spain and Greece) are reported in Figure 5.2 in the main text. The summary of the results for all EUR-12 is given in section 5.1 in the main text.