Micro Analytic Simulation Models for Political Planning
by Hermann Quinke
The ever increasing complexity is a distinctive characteristic of tax and transfer laws. It is therefore impossible to evaluate proposed or enacted amendments without appropriate simulation models. GMD has a long standing tradition in developing such models and applying them in the context of the political decision making process. The project MIKMOD continues this tradition, because the demand for such models by the federal administration remains high and because their development poses interesting research problems.
MIKMOD focuses on the development and application of microsimulation models for taxes and transfer programs and other types of models that proved useful for the analytical tasks of the administration. Microsimulation models are well suited for estimating the cost of law changes ie the change of total program cost or tax revenue. They are based on a projected representative sample of the relevant population segment, the micro data base. These models are also capable of estimating the distributive impact of the amendments.
For the German Federal Ministry for Education, Science, Research and Technology, we still maintain and update regularly the static micromodel BAFPLAN for the analysis of the federal training assistance act (BAföG). BAFPLAN is one of the few microsimulation models in Germany, which has been used in various versions on a regular basis for over fifteen years. We have built a comparable model for East Germany, because the income level and other socio-economic characteristics in East and West Germany are and continue to be very divergent.
To keep the forecasting errors within reasonable bounds the database of BAFPLAN has to be replaced by a more timely sample of eligible students on a regular basis. Also the student forecasts, underlying the projection (ageing) of the sample, are regularly updated. Experience with BAFPLAN indicates, that these models are of course still prone to error, but that the forecasting errors are significantly smaller than those of the more intuitive methods formerly used.
The Federal Ministry for Families, the Elderly, Women and Youth has a special need for tools to analyse the economic conditions of the elderly. To satisfy these needs GMD developed AsA (Analysesystem Alterssicherung), a comprehensive model for simulating the formation of old-age income and its levying with social security contributions and taxes. It has been used extensively in the discussion about the radical change in the taxation of old-age income as well as for analysing the reform of the core pension insurance (Gesetzliche Rentenversicherung).
AsA consists of two components. One component comprises a classical static microanalytical simulation model in which specific variants of income-tax and social contributions are specified and the incomes of a representative sample of persons receiving old-age income are exposed to these variants. A common data base has been developed for the Federal Ministry for Families, the Elderly, Women and Youth and the Federal Ministry of Finance, derived from a survey by Infratest. The second component of AsA is a typical case model. It allows for analysing the generation of old-age income depending on individual biographies and the membership of an individual in one or more of the different systems providing old-age income. Due to the particular usage of AsA in the policy making process special emphasis has been put on the parametrization of the institutional specifics in order to speed up the analysis of the economic effects of proposed legislative changes.
For the same ministry we developed APF, a decision support system for analysing direct and indirect transfers to families with dependent children. Like AsA it contains an elaborate typical case model, which is able to analyse the impact of direct and indirect taxation as well as the effect of all major transfers on the disposable income of families, seen as typical by the user. It also comprises a micromodel for estimating the cost of transfers to families with children. Because stringent data protection laws prohibit the access to a sample of tax returns for this ministry, the latest income and expenditure survey is used as the database. This survey had to be adjusted to key tables of the income tax statistic to reflect fully the income distribution of families. APF is the main analytical tool of the ministry in the ongoing discussion about public transfers to families.
The personal income model of the German Federal Ministry of Finance is based on a stratified sample of 123 thousand income tax returns, which was drawn and updated by MIKMOD. This model provides detailed analysis of changes in personal income tax. In order to estimate the distributive effects of decreasing income taxes and increasing indirect taxes, especially energy taxes, MIKMOD imputed the consumption pattern of all tax units in the sample by matching the income and expenditure survey and the sample of tax returns.
Please contact:
Hermann Quinke - GMD
Tel: +49 2241 14 2727
E-mail: quinke@gmd.de