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Forecasting tax revenuesin the Netherlands
Eugene Verkade ([email protected])
Seminar on Best Practices
in Forecasting Public Revenues
Statec , 27 January 2012
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CPB Netherlands Bureau for Economic Policy Analysis
Overview
The macro economic forecasting process (at CPB)
The role of estimating Dutch tax revenues
Actual process of tax revenue forecastingBIMBAM-model approach
use of expert opinion
use of realization figures
Summary and conclusions
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Macro economic forecasts, when, why and for whom?
Short-term forecasts (1-2 years ahead)
Four times a year
budget cycle (for next years policy changes)
Medium-term forecasts (4 to 5 years ahead) Medium-term economic outlook
Election platforms
Coalition agreement
Policy preparation, analysis and research
Note : CPB provides independent forecasts and policy research
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Economic Forecasting. an interactive estimation process
Macroeconomic
model
Labour
market
Incomes
and prices
Taxrevenue
Social
security
Health
care
Rest ofthe World
Govt
spending
Construction
Energy
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Modelling tax revenues
National Accounts definition (EMU) vs. Ministry of Finance defintion
Economic relevance vs. policy relevance
Policy effects vs. endogenous effects
CPB uses 2 models :
MIMOSI : wage and income tax , social security contributionsBIMBAM : all other taxes
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Overview main tax categories (NA value)2010
bln euro % GDP
2010
bln euro % GDP
Value added tax 42.7 7.2% Dividend tax 3.1 0.5%
Wage tax 46.1 7.8% Import duties 1.8 0.3%
Corporate tax 12.8 2.2% Income tax 2.1 0.4%
Excises 11.1 1.9% Inheritance tax 1.7 0.3%
Environmental levies 8.5 1.4% Wealth tax 0.0 0.0%
Motor vehicle tax 5.2 0.9% Insurance tax 0.9 0.1%
Motor vehicle purchase tax 2.1 0.4% Other taxes 2.1 0.4%
Conveyance tax 2.8 0.5%
Real estate property tax 3.0 0.5% Total tax revenues 146.0 24.8%
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CPB Netherlands Bureau for Economic Policy Analysis
0 %
5 %
1 0 %
1 5 %
2 0 %
2 5 %
3 0 %
3 5 %
4 0 %
4 5 %
5 0 %
1 9 7 0 1 9 8 0 1 9 9 0 2 0 0 0 2 0 1 0
% G D P
y e a r
S h a r e o f t a x e s a n d s o c i a l s e c u r i t y c o n t r i b u t i o n s i n G D P
T o t a l t a x e s
T o t a l s o c i a l s e c u r i t y c o n t r i b u t i o n s
T o t a l t a x e s + s s c
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0 %
2 %
4 %
6 %
8 %
1 0 %
1 2 %
1 9 7 0 1 9 8 0 1 9 9 0 2 0 0 0 2 0 1 0
% o f G D P
y e a r
Tax share in GDPw a g e a n d i n c o m e t a x e s
V A T
c o r p o r a t e t a x e s
o t h e r t a x e s
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Forecasting process
1. List all new budgetary policy measures (in
close cooperation with the Ministry of Finance)2. Estimate the ex ante impact of each measure (model input)
3. Collect latest monthly tax data
4. Bring in the most recent macro economic forecast
5. Estimating future tax revenues following these latest forecast (modelrun)
6. Expert judgement on model outcomes
7. Results go back to macro model
step 4-7 will be repeated during several rounds
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CPB Netherlands Bureau for Economic Policy Analysis
Forecast tax revenue per category
revenue (T-1)+ (a) policy effect ( exogenous in mln )
+ (b) endogenous effect ( endogenous )
+ (c) adjustment ( exogenous in mln )
+ (d) forecast error (for the past) ( if relevant )_________________
= revenue (T)
hence : (a) crucial expert judgement, determined outside model
(b) guarantees consistency with latest economic forecast
(c) and (d) only if necessary
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CPB Netherlands Bureau for Economic Policy Analysis
Modelling the endogenous effect
VAT : linked to disaggregated demand(private consumption by sector, investment, etc)
income tax : MIMOSI model (next slide)
corporate tax : rather problematic , highly relevant
(related to non wage income , but impact of loss compensation)
most other taxes : most linked to overall GDP growth
(ex post adjustment)
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The MIMOSI model
to calculate wage and income tax and for social security contributions
based on micro data base
overview of taxable income on households, major items on deduction
pure bookkeeping model
(behavioral reactions come from macro models)
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Monthly monitor
Tax authorities provides monthly cash figures up to previous month
These monthly figures are highly volatile(unclear seasonal pattern)
Therefore, additional information with limited impact on year forecast
NA figures follow cash figures with one month lag for most taxes(for some taxes no lag)
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Summary and conclusions
BIMBAM is a rather large, detailed model with many different taxes
included. but only a few really matter for budget balance
Distinction between policy effects and endogenous effect useful for policymaking process
Quality of forecasts depend on the quality and suitability of inputs
Forecasting corporate tax remains a challenge
Estimating is not a mechanical process: important role for plausibilitychecks
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Thank you for your attention
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