Crisis, Austerity and Automatic Stabilization Long vs. Short Term Effects

Transcription

1 Crisis, Austerity and Automatic Stabilization Long vs. Short Term Effects Mathias Dolls (ZEW) Clemens Fuest (ifo Institut & University of Munich) Andreas Peichl (ZEW, University of Mannheim & ISER) Christian Wittneben (ZEW) Fiscal Week,

2 Introduction Motivation Motivation Sovereign debt crisis in Europe led to budget consolidation measures in many EU countries Fundamental changes in tax and transfer systems Tax increases and spending cuts aimed at keeping government budgets at balance Additional burden on Household incomes, in the presence of declining GDP However, long term: Higher fiscal stabilization effect (automatic stabilizers) Higher redistributive effect Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

3 Introduction Motivation Motivation Tax benefit systems provide (temporary) income insurance through built-in automatic stabilizers in times of crises elements of the tax and transfer system that mitigate fluctuations in output without discretionary government action: progressive taxation (unemployment) benefits Great Recession + sovereign debt crisis followed by policy reforms (austerity measures) potentially affecting AS in many countries But: Magnitude of stabilization effect depends on changes to the tax and transfer system the government may make We ask: How did automatic stabilizers change from 2007 to 2014? Did governments let automatic stabilizers work? Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

4 Introduction Agenda 1 Introduction 2 Data and Methodology 3 Results 4 Conclusion Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

5 Data and Methodology Microsimulation Models Microsimulation Models (MSM) Most studies on AS rely on Macro data. Recent work also uses structural models (e.g. Mckay & Reis 2016) What we do: Employ a Microsimulation Model Tool to compute how a gross income shock translates into changes of disposable income allow for exogenous variation in gross income disentangle automatic stabilizers from discretionary fiscal policy and behavioral responses Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

6 Data and Methodology Microsimulation Models Microsimulation Models (MSM) EUROMOD static tax-benefit MSM for the EU-27 MSM to calculate (cash) benefits and (direct) tax liabilities......for a representative micro-data sample for each country Data: 2007 EU-SILC use pre-crisis (2007) micro-data for analysis this allows us to single out the policy effect Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

7 Data and Methodology Scenarios Scenarios Currently we model: Proportional reduction in household gross income by 5% for each household (income shock) Later also consider: Increase of unemployment rate by 5 percentage points (unemployment shock) modeled through reweighting Combined Shock Actual Changes in GDP Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

8 Data and Methodology Measurement of Stabilization Measurement of Stabilization 1/2 Market income Y M i of individual i: Yi M = E i + Q i + I i + P i + O i where E i are earnings, Q i business income, I i capital income, P i property income, and O i other income Disposable income Y D i : Y D i = Y M i G i = Y M i (T i + S i B i ) with T i : direct taxes, S i : employee social insurance contributions, B i : benefits (i.e. negative taxes) Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

9 Data and Methodology Measurement of Stabilization Measurement of Stabilization 2/2 Income Stabilization Coefficient How much of a given shock is absorbed by the tax and transfer system? τ I i = 1 Y i D i Y = i M i ( Y i M Y i D ) i Y = i M i G i i Y i M τ I resembles average effective marginal tax rate (EMTR) Example: τ I = 0.4: 40% of an income shock absorbed by t-b system Determinants: government size, structure of tax benefit system Contribution of different components: τ I = τf I = τ Tax + τ SIC + τ Ben = i Ti + f Y M i i i Si Y M i i i Bi Y M i i Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

10 AS Levels AS Levels 2014 Income Stabilization Coefficient BG EE LT MT CY LV CZ SK RO ES HU FR SE EL PT UK SI NL LU FI DE DK AT IT BE Direct Tax SIC Benefits Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

11 AS Levels AS Over the Crisis Income Stabilization Coefficients AT BE DE FR NL LU EE FI DK LV SI SK LT CY EL ES IE SE HU RO IT MT BG CZ UK PL PT Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

12 AS Changes AS Changes: Difference : τ tau HU BG DK SE LT DE CZ MT BE AT NLFI SI UK RO LV EE IT LU FR SK ES CY EL PT Delta tau Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

13 AS Changes AS Changes : τ TAX DK tau_tax HU BG LT SE BE FI DE NL AT UK LV EE MT RO SI CZ FR SK IT LU ES CY EL PT Delta tau_tax Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

14 AS Changes AS Changes : τ SIC tau_sic SI HU BE AT FR CZDE NL LU IT BG ELRO PT UK LV DK FI SE ES MT CY EE SK LT Delta tau_sic Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

15 AS Changes AS Changes : τ BEN UK tau_ben MT RO SI LU SK CZ DK NL PT FI IT BG SE CY DE HU AT BE ES LV EE EL LT FR Delta tau_ben Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

16 AS Changes Changes in Redistributive Effect: DPI Gini Look at changes in the redistributive effect of tax reforms Compare Gini-coefficients 2007 and 2014, holding incomes fixed (at 2007 levels) The effect is only due to tax changes Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

17 AS Changes Changes in Redistributive Effect: DPI Gini gini_dpi_b PT LV RO LT EL BG EE UK IT ES CY FR FI LU SI BE SK MT NL DE AT DK CZ SE HU Delta gini_dpi_b Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

18 AS Changes Changes in Redistributive Effect: DPI Gini Tax increases lead to lower after-tax income Gini More redistribution through tax and transfer system Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

19 AS Changes Short Term Effect previous AS measures assume economy in (long-run) equilibrium However, austerity measures might not work in the short run, when governments adjust the tax and transfer system (discretionary changes) short-run measure: construct difference in disposable incomes for household i when subject to tax policy in period t and when subject to tax policy in period t + 1: ( θ I,T t+1 = i T (0.95Yi M ), X i, χ t+1 ) T (Yi M, X i, χ t ) i Y M i Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

20 AS Changes Short Term Effect ( θ I,T t+1 = i T (0.95Yi M ), X i, χ t+1 ) T (Yi M, X i, χ t ) i Y M i coefficient measures the change in the tax and transfer system relative to hypothetical 5% change in the gross income compare the tax burden of the household under the new system at the reduced income to the hypothetical shock Example: θ = 1. Then the increase in taxes even after a decline in income is as large as a 5% loss in gross income Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

21 AS Changes Stabilization Coefficient BE HU DE IT AT SI EANL FI UK SE LU FR EU EL CZ PT ES LV EE MT CY LT Destabilization Coefficient RO SK BG THETA f(x)=x Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

22 AS Changes Stabilization Coefficient BE DE ITHU AT DK LU EA FI NL UK SI SE EL EU FR LV RO PT ES CZ SK LT MT EE CY BG Destabilization Coefficient THETA f(x)=x Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

23 AS Changes Stabilization Coefficient BE IT DEDK AT EA NL FI HUEL UK LU SI SE FREU ES PT RO LV CZ SK CY MT EE LT BG Destabilization Coefficient THETA f(x)=x Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

24 AS Changes Stabilization Coefficient BE FI LUAT DEIT DK NL EA PT EL UK SI CZ ES EU FR SE HU SK RO LV LTCY MT EE BG Destabilization Coefficient THETA f(x)=x Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

25 Conclusion Conclusions Large heterogeneity within the EU both in levels and (policy) changes in AS AS play an important role in stabilizing incomes Countries with stronger AS were resilient during the crisis while those with weak AS experienced major economic contractions and increases in unemployment (correlation, not causation) Redistribution through tax-and-transfer system is higher (long-term) However: increasing AS during crisis can have short-term destabilizing effects AS worked After 2009, austerity measures implemented, weakened AS Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

26 Conclusion The End Thank you for your attention! Comments? Questions? Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

27 Appendix Related Literature Related Literature Macroeconometric studies: e.g. Gali (1994), Fatas & Mihov (2001), Girouard & André (2005), Dolls et al. (2014) Theory: ambigous. Empirics: neg. correlation btw. gov. size and GDP volatility Issues: discretionary and automatic stabilization confounded Microeconometric studies: Microsimulation analysis to single out automatic stabilization: Auerbach & Feenberg (2000), Mabbett & Schelkle (2007), Dolls et al. (2011, 2012a,b) Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28

28 Appendix Related Literature AS Levels 2007 Income Stabilization Coefficient CY MT ES BG PT EL FR LU EE LT SK LV RO CZ UK SI SE IT NL FI AT DK BE DE HU EU27 EA18 Direct Tax SIC Benefits Dolls/Fuest/Peichl/Wittneben (ZEW) Crisis and Automatic Stabilization Fiscal Week, / 28