Which impacts does the introduction of a new tax rate have on the total income tax revenue? Which income groups lose or win under the new rate and to what extent? Which distributional effects do other attempts of taxing families have compared to income splitting of spouses?
In order to answer these kind of questions, MIKMOD developed the income tax microsimulation model MIKMOD-Est together with the Federal Ministry of Finance (BMF). The model is used on an empirical analysis of the distributional effects of proposed income tax reforms. The model’s basis constitutes an anonymized sub sample of 10 percent of our income tax statistics (Lohn-und Einkommenssteuerstatistik) sample. The data base is updated regularly according to economic and demographic development so that we can continue making reliable forecasts in the future. Technically, the model’s main idea is to translate the current income tax act into executable Java code. Within this process, lots of numerical values of the income tax law such as child allowance (Kinderfreibetrag) are parameterized. As of today, we are able to model 104 features of the tax law which in particular include those features that have often been changed in the past or that have always been subject to intense political discussions. If a parameter is changed, the model computes the tax obligation for all tax payers under the current legislation and compares it with the proposed reform by illustrating the overall effects of the change with the help of spreadsheets and tables. We can also predict the effects of more complex legislation changes. In order to do that, we would translate the legislation changes into corresponding changes of the Java code.
The model has been used prior to various proposed reforms and to estimate the distributional effects of current legislation since 2007. Within the legislative process of the introduction of the German Citizens’ Relief Act (Bürgerentlastungsgesetz), MIKMOD-Est computed the effects of a higher tax deductibility of health and nursing care insurance dues. In advance of the economic stimulus packages we made a range of forecasts that dealt mostly with different amounts of the child benefit. In addition, the model is frequently used to predict the impacts of changes in various political measures such as the child allowance (Kinderfreibetrag) or the income splitting of spouses with the help of the BMF’s data collection on tax policy. In the recent past, our computations of the revenue elasticities of the income tax are also part of the BMF’s official tax appraisal.