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EUROMOD Working Paper EM9/01
The aim of the project was to build EUROMOD, a tax-benefit microsimulation model covering all 15 Member States of the European Union. This has been achieved, and baseline results are available for 14 countries. (Validated results for Sweden will appear shortly.) EUROMOD has been used for a number of policy-related exercises ranging from studies of the relationship of public spending on social benefits to poverty and the implications of a common European minimum pension, to the impact of welfare benefits on work incentives and the consequences of non-indexation of taxes and contributions. In addition, the model is ready to be used for a wide range of new applications. Not only can it be used to explore the impact of prospective (and hypothetical) changes in social and fiscal policy on poverty and inequality; it can also estimate the cost of reforms, provide options for financing mechanisms, and establish the effect of the reforms in other dimensions such as the work incentives of household members and any implied redistribution within the household. In many ways, EUROMOD is ahead it its time. When the project first started in 1998 (and when the idea was first conceived in 1996) the priorities set at the Lisbon European Council could not have been fully anticipated. It is now clear that the project was timely. EUROMOD is ready to play a role in analysing changes in social and fiscal policies proposed by Member States with reference to agreed benchmarks for the reduction of poverty and social exclusion. The project final report describes in some detail the process of model construction. It was a very complex project that was more demanding for all concerned than could have been anticipated. In some respects it was more akin to an engineering enterprise than a social science research project. In building EUROMOD, particular emphasis has been placed on • transparency of methods: it is therefore open to critiques of the approach as a whole, as well as criticism and suggestion on matters of detail; • designing a model that is flexible and adaptable: to make the range of uses as wide as possible and to maximise the length of its useful life; • consistency and comparability across countries: developing harmonisation of methods, assumptions and input and output concepts is a major part of building an integrated European model. Concretely, it involved: • identifying common structural characteristics in national policies • identifying common data requirements • parameterising and generalising as many aspects of the model as possible, including the definitions of the income base and unit of assessment or entitlement for each tax and benefit, the effective equivalence scales inherent in social benefit payments, and the output income measure. This approach not only allows each system to be modelled in a manner that is comparable to existing national practice, it also provides the model user with a much greater range of choice and greater flexibility than – we believe – is available in any other existing tax benefit model. Before the project began, the degree of experience and expertise with tax-benefit modelling in Member States varied greatly. As is well known, the tax and transfer systems also vary widely in underlying philosophy, as well as in current structure and size. The national sources of microdata with which to build the model were not equally suited to the task. One of the project’s most significant achievements is its success in bringing tax-benefit modelling capacity in all Member States up to the level of best practice in the EU.
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