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Taxes and benefits

Research articles · Apr 30, 2019

Tax-benefit microsimulation and income redistribution in Ecuador

H Xavier Jara, Marcelo Varela

Institute for Social and Economic Research, University of Essex, United Kingdom; Instituto de Altos Estudios Nacionales, Ecuador

Volume 12(1) Spring 2019

Cite as: H. Jara, M. Varela; 2019; Tax-benefit microsimulation and income redistribution in Ecuador; International Journal of Microsimulation; 12(1); 52–82. doi: 10.34196/ijm.00194

Abstract

The aim of this paper is to explore the redistributive effects of taxes and benefits in Ecuador using two different approaches: direct use of reported taxes and benefits in survey data, and use of simulated taxes and benefits. We make use of representative household microdata from ENIGHUR 2011–2012, which contains detailed information on labour and non-labour income, taxes and social insurance contributions, public pensions, social benefits and expenditure, as well as personal and household characteristics. First, ECUAMOD, the tax-benefit microsimulation model for Ecuador is used to simulate cash benefit entitlements, personal income tax and social insurance contribution liabilities, as well as indirect taxes. Then, the redistributive effect of simulated tax-benefit policies is compared to that obtained from taxes, social insurance contributions and benefits taken directly from the data. Our results show that simulated taxes and social insurance contributions capture better the number of taxpayers and aggregate revenue amounts from official statistics, compared to information taken directly from the data. Moreover, using reported data on taxes and social insurance contributions underestimates their redistributive effect, compared to simulated policies. Underreporting of income components in survey data and the difficulty of simulating complex eligibility rules for benefits in microsimulation models are some of the factors driving the differences between the two approaches. Our paper concludes with a discussion of the advantages offered by microsimulation for policy analysis.

This article contains 1 figure and 8 tables.

Figures

Figure 1. Tax-benefit components as a share of household disposable income in 2011.

Tables

Table 1. Tax–benefit instruments in 2011: number of recipients/payers (in thousands).
ECUAMOD ENIGHUR External Ratios
(A) (B) (C) (A)/(B) (A)/(C) (B)/(C)
Social Benefits
Human Development Transfer 1,538 1,681 1,854 0.92 0.83 0.91
Joaquín Gallegos Lara 9 9 14 1.00 0.64 0.64
Taxes and Social Insurance Contributions (SICs)
Personal income tax 334 204 476 1.64 0.70 0.43
Employee SICs 2,134 1,836 2,449 1.16 0.87 0.75
Self-employed SICs 255 74 341 3.46 0.75 0.22

Source: ECUAMOD version 1.4 calculations, ENIGHUR 2011–2012 and IESS (2015).

Table 2. Tax–benefit instruments in 2011: annual amounts (in millions).
ECUAMOD ENIGHUR External Ratios
(A) (B) (C) (A)/(B) (A)/(C) (B)/(C)
Social Benefits
Human Development Transfer 661 706 724 0.94 0.91 0.97
Joaquín Gallegos Lara 26 24 41 1.07 0.62 0.58
Taxes and Social Insurance Contributions (SICs)
Personal income tax 639 171 784 3.75 0.82 0.22
Employee SICs 1,478 1,322 1,508 1.12 0.98 0.88
Self-employed SICs 332 268 176 1.24 1.88 1.52
VAT 1,708 592 3,073 2.88 0.56 0.19

Source: ECUAMOD version 1.4 calculations, ENIGHUR 2011–2012 and IESS (2018).

Table 3. Progressivity of tax-benefit components in 2011– Suits index.
Public Pensions Social Benefits Direct Taxes Social Insurance Contributions Indirect Taxes
ECUAMOD −0.21 0.62 0.74 0.25 −0.03
ENIGHUR −0.19 0.61 0.42 0.24 0.83

Source: ECUAMOD version 1.4 calculations and ENIGHUR 2011–2012.

Table 4. Absolute poverty rates and income inequality in 2011.
ECUAMOD (A) ENIGHUR (B) Ratio (A)/(B)
Inequality
Gini 46.1 47.7 0.97
p90/p10 7.4 7.7 0.96
Atkinson index (0.5) 17.8 19.3 0.92
Atkinson index (1) 30.8 32.6 0.94
Atkinson index (2) 50.5 52.4 0.96
Poverty headcount
Total 20.8 21.7 0.96
Urban 12.5 13.3 0.94
Rural 37.6 38.5 0.98
Extreme poverty headcount
Total 5.7 6.2 0.94
Urban 2.3 2.7 0.85
Rural 12.7 13.3 0.95

Source: ECUAMOD version 1.4 calculations and ENIGHUR 2011–2012.

Notes: Computed for individuals according to their household disposable income per capita. Household disposable income is calculated as the sum of all income sources of all household members net of income tax and SICs.

Table 5. Effect of the tax-benefit system on income inequality and poverty in 2011.
Market income Disposable income (DPI) Difference
Gini coefficient
ECUAMOD 50.2 46.1 4.1
ENIGHUR 50.2 47.7 2.5
Poverty headcount
ECUAMOD 24.9 20.8 4.1
ENIGHUR 24.9 21.7 3.2
Extreme poverty headcount
ECUAMOD 9.4 5.7 3.7
ENIGHUR 9.4 6.2 3.2

Source: ECUAMOD version 1.4 calculations and ENIGHUR 2011–2012.

Table 6. Effect of tax-benefit components on income inequality in 2011.
Disposable income (DPI) DPI minus Public Pensions DPI minus Social Benefits DPI plus Direct Taxes DPI plus SICs DPI minus Indirect Taxes
(A) (B) (C) (D) (E) (F)
ECUAMOD 46.1 46.3 47.8 47.1 47.4 46.2
ENIGHUR 47.7 47.9 49.4 48.0 48.6 46.9

Source: ECUAMOD version 1.4 calculations and ENIGHUR 2011–2012.

Table 7. Effect of tax-benefit components on income poverty in 2011.
Disposable income (DPI) DPI minus Public Pensions DPI minus Social Benefits DPI plus Direct Taxes DPI plus SICs DPI minus Indirect Taxes
(A) (B) (C) (D) (E) (F)
Poverty headcount
ECUAMOD 20.8 22.3 24.2 20.7 20.3 22.9
ENIGHUR 21.7 23.1 25.1 21.6 21.4 21.7
Extreme poverty headcount
ECUAMOD 5.7 6.7 8.6 5.7 5.7 6.6
ENIGHUR 6.2 7.1 9.1 6.1 6.2 6.2

Source: ECUAMOD version 1.4 calculations and ENIGHUR 2011–2012.

Table A.1. Simulation of taxes and benefits in ECUAMOD.
Policy instrument Treatment in ECUAMOD Why not fully simulated?
Simulated tax-benefit instruments
Employee social insurance contributions Simulated -
Armed forces and police
social insurance Simulated -
contributions
Self-employed social insurance contributions Simulated -
Employer social insurance contributions Simulated -
Government social
insurance contributions for Simulated -
armed forces and police
Personal income tax Simulated -
Human development transfer (HDT) Simulated -
Joaquín Gallegos Lara Partially simulated Eligibility for the benefit cannot be simulated to lack of information about severity of disability in the data
Value added tax (VAT) Simulated -
Special consumption tax (excise duties) Simulated -
Non-simulated tax-benefit instruments
Old-age pension Included No data on contribution records
Invalidity pension Included No data on contribution records
Survivors’ pension Included No data on contribution records
Injury benefit Included No data on contribution records
Severance payments Included No data on contribution records No information about students’
Scholarships Included grades to determine eligibility for scholarships
Housing grant Included No information about the price of the property individuals intend to buy nor about the cost of planned remodelling for their current house
Property tax and property transfer tax Included No information on property values in the data
Wealth tax Included No information on wealth in the data
Motor vehicle tax Included No information on vehicle values in the data

Source: Authors’ compilation.