Research on redistributive effects of Croatian fiscal system

Ivica Urban

Institute of Public Finance

Distribution of fiscal burdens and benefits in Croatia

Only partially investigated Distribution of PIT analyzed in several

studies Distribution of VAT Influence of social benefits on income

inequality

Distribution of fiscal burdens and benefits in Croatia

No attempt to provide combined incidence calculation for several tax and benefit instruments

Income inequality in Croatia

World Bank (2006), Nestić (2005), World Bank (2001)

Disposable income inequality in Croatia is low in comparison with other transition countries

What is the influence of government on distribution of income?

Theses for research

Government redistributive policies are one of the prime determinants of disposable income inequality in Croatia

The largest part of income redistribution process is achieved through the public pension system

Fiscal instruments are highly efficient in reducing inequality (well-targeted and introducing low horizontal inequalities)

“Inequality” studies

Kesselman & Cheung (2004): Tax Incidence, Progressivity, and Inequality in Canada

Computable general equilibrium (CGE) Fiscal incidence (FINC) and Inequality (INEQ) studies: analyze

single tax forms or groups of taxes and/or benefits

“Inequality” studies

Assumptions (deficiencies, restrictions, problems with...)

a) inclusion only of direct taxes and benefits in analysis; exclusion of indirect taxes and in-kind government benefits,

b) income earners cannot shift the burden of personal taxes,

c) existence of taxes and transfers does not affect market incomes,

d) annual instead of lifetime perspective

“Inequality” studies: examples

Kim & Lambert (2007): Redistributive Effect of US Taxes and Public Transfers, 1994-2004

Immervoll et al. (2005): Household incomes and redistribution in the European Union: quantifying the equalising properties of taxes and benefits

Methodology

NX DGV

NN DGR

RVGGRE NX

bg

bg

V

n

j

jB

jm

i

iT

i

111

= Kakwani progressivity index of taxes T

V = Vertical effect

R = Reranking effect

GX = Gini coefficient of pre-fiscal income

GN = Gini coefficient of post-fiscal income

RE = Redistributive effect

= Kakwani regressivity index of benefitsB

NTN GGi

NBN GGj

Lambert (1986, 2001):

Immervoll et al. (2005):

DN = Concentration coefficient of post-fiscal income

Alternative approaches

A B C D

Method: Decomposition of vertical effect

Exclusion of one-by-one instrument from the base

Decomposition of vertical effect

Exclusion of one-by-one instrument from the base

Reference income: Pre-TB Pre-TB Post-TB Post-TB

Methods:

1. Lambert (1986) – Decomposition of vertical effect

2. Immervoll et al. (2005) – “Exclusion” of one-by-one instrument from the reference base

Reference income base:

1. Pre-TB income

2. Post-TB income

Equivalent incomes

iii eYy /

iii childrenadultse 3.05.05.0

Defining groups of households

EM = employed or self-employed, UN = unemployed or inactive; EL = the elder

Type Characterization Equivalent units in 2005 (%)

Fully employed EM 0, UN 0, EL 0 33.5 Mixed EM 0, UN 0, EL 0 32.5 Workless EM 0, UN 0, EL 0 16.2 Elder only EM 0, UN 0, EL 0 17.8

Distribution of income, taxes and benefits in 2005 (1)

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

70

80

90

100

Fully employed Mixed Workless Elder only

PIT

SSC

Non means-testedbenefits

Means-testedbenefits

Pensions (<65)

Pensions (65&>)

Total marketincome (after tax)

Distribution of income, taxes and benefits in 2005 (2)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Fully employed Mixed Workless Elder only

Non means-testedbenefits

Means-testedbenefits

Pensions (<65)

Pensions (65&>)

Other (periodic)private income

Non-taxable marketincome

Taxable marketincome (after tax)

Entropy index decomposition

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

Pre-TB Post-TB Pre-TB Post-TB

En

tro

py

ind

ex

Within-group

Between-group

Inequality

5.0 0.2

Distribution of income, taxes and benefits in 2005 (3)

6

16

26

51

13 1216

23

36

0.50

10

20

30

40

50

60

1 2 3 4 5

Quintile groups

Pe

rce

nt o

f th

e to

tal

Pre-TB income Disposable income

3

13

24

60

39

20

129 6

0.40

10

20

30

40

50

60

70

1 2 3 4 5

Quintile groups

Per

cent

of

the

tota

l

SSC and PIT Pensions and benefits

Inequality measures

0.0

0.2

0.4

0.6

0.8

5.1 2 3

RE

R

DN

R+DN=GN

RE+R+DN=GX

Decomposition of redistributive effect

0.0 0.2 0.4 0.6 0.8 1.0

Post-TB

Pre-TB

Ref

eren

ce i

nco

me

bas

e

Contribution

Pens(65&>) Pens(<65) PIT Child AFamSuppA SSC-PensF SSC-HealthF Other

Preliminary conclusions

Croatian system of direct taxes, pensions and social benefits seems to be highly redistributive

Public pensions are the most contributive instrument, followed by SSC and PIT

Unfinished research, still lot to do

Fiscal system coverage

PIT and SSC = 38% of total general government revenue

Public pensions and cash benefits = 34% of total expenditures (2006)

Huge part of fiscal system is still outside the coverage of this analysis

Further issues (1)

How does Croatian fiscal system stand in comparison with EU countries in terms of achieving equity goals?

Are the individual instruments and the system as a whole enough redistributive?

Are there some instruments that are not equitable? Should taxes be more progressive?

Can the overall redistributive effect be significantly altered through increase (decrease) of the PIT rate schedule progressivity?

Further issues (2)

How can total welfare be increased keeping the amount of expenditures and taxes unchanged?

What equity role have public pensions now, and how it should be in future?

How can other fiscal instruments be included into current model to obtain more comprehensive picture of fiscal incidence?