Annex 4 analytical methods

For a complete overview of EUROMOD readers are invited to consult  Sutherland and Figari (2013), "EUROMOD: The European Union Tax-Benefit Microsimulation Model", International journal of microsimulation, 6(1) 4-26". The paper is the main source of information for the following sections (Detail on EUROMOD structure and approach; Input and parameters).

EUROMOD is a static tax-benefit calculator that allows the simulation of tax liabilities and benefit entitlements for a representative sample of households and individuals in each EU Member State and the UK (up to 2020). The model is static and non-behavioural, in the sense that it does not take into account socio-demographic changes and behavioural responses of individuals. The scope of EUROMOD simulations includes Personal Income Tax, Social Insurance Contributions paid by employees, self-employed and employers and most non-contributory benefits. Contributory benefits (e.g. pensions) are usually not simulated because of lack of relevant information (e.g. contribution history) in the underlying data. Nevertheless, some contributory benefits such as unemployment benefits are simulated making use of assumptions where needed. For those not simulated, the values collected in the underlying data are used and included in the concept of disposable income.

Depending on when a country module was first introduced in EUROMOD, the first policy system included in the model varies from 2005 to 2007 (2011 for Croatia). All the following policy systems are included up to the current year (2021) with the exception of the UK, which is updated until 2020. 

EUROMOD baseline simulations are validated and tested both at a micro level (i.e. case-by-case validation) and at macro level (comparing aggregate amounts and recipients/payers with official statistics). A similar process is applied to income distribution and poverty statistics. The results of the validation exercises are reported in the Country Reports (available on the EUROMOD web pages). 

Although EUROMOD simulations usually assume full benefit take up and full tax-compliance,  adjustments for benefit non take-up and/or tax evasion are simulated in a number of country modules. Such adjustments are modelled in a transparent way that can be activated or deactivated by users. 

EUROMOD code is written in C# and compiled. Users use the model through a standalone user interface, programmed using Microsoft .net Framework.

See Sutherland and Figari (2013) for a complete overview of EUROMOD.

EUROMOD input datasets are usually derived from the European Union Statistics on Income and Living Conditions (EU-SILC), as harmonised by EUROSTAT. In some cases the EU-SILC is enriched using variables contained in the national SILC surveys, which are the basis for the harmonised version. In some other cases the national SILC surveys are used directly. The EUROMOD input datasets include the following key inputs:

• demographics at household and individual level
• labour market characteristics
• gross incomes from market and other income sources (i.e. pensions, public transfers and private incomes)

A network of teams of national experts also collects information on the policy rules in place in each country each year.

The original survey data undergo a process of transformation and imputation before being used as EUROMOD input dataset. In particular, a process of imputation aimed at “splitting” the aggregated benefit variables provided in EU-SILC is applied. The process is described in the EUROMOD country reports. In addition, variables are renamed to follow the EUROMOD naming conventions (aimed at improving cross-country comparability).

The income variables contained in a EUROMOD input dataset are uprated using specific uprating factors when the year to which the income variables refers to differs from the tax-benefit systems to be simulated.

Starting from 2021, EUROSTAT and JRC, with the agreement of the National Statistical Institutes, are gradually implementing a new data production workflow. It consists in EUROSTAT producing and distributing to National teams a new dataset called EUROMOD SILC Database (EMSD) containing the harmonised EU-SILC already enriched with selected variables form national SILC and information derived from the SILC production database (PDB). The new data workflow simplifies the process of accessing Nationals SILC variables and the dissemination of the EUROMOD input data among users.

See Sutherland and Figari (2013) for a complete overview of EUROMOD.

The output microdata contains information on the:

• demographic characteristics of individuals and households, as well as their financial circumstances
• simulated and non-simulated tax-benefit instruments
• disposable income.

The information contained in the output microdata can be analysed using built-in plugins (Statistics Presenter and In-depth analysis) or other statistical software (such as R or STATA).  

EUROMOD is unique in being a research tool that is relevant not only at national level and as an integrated tool for European comparative social science research, but also as a model of the EU as a whole. EUROMOD brings a distinctive economic research on the redistributive effects of tax-benefit policies across Europe.

The JRC has developed an interaction of EUROMOD with the DG ECFIN model QUEST in close collaboration with DG ECFIN and ZEW-Mannheim (see Barrios et al., 2016). Published JRC research includes analyses of in-work tax expenditures for low income workers (see Barrios et al., 2015) and contributions to the Commission Tax reforms in the EU Member States report (see European Commission 2014, 2015). EUROMOD is also used in combination with the GEM-E3 model to analyse the distributional impact of green taxes. EUROMOD provides also the micro-parameters needed to run the EDGE-M3 model.

The model has increasingly been used by the Commission services over the past few years. DG EMPL uses results from the model for its Quarterly and Annual reports on Employment and Social Developments in Europe (European Commission 2018) and different research notes delivered in the context of the Social Situation Monitor are based on EUROMOD. EUROMOD based simulations are also used by DG ECFIN in the Report on Public Finances in EMU (European Commission 2017). EUROMOD is also used by ESTAT for the production of the flash estimates on income and poverty: https://ec.europa.eu/eurostat/web/experimental-statistics/income-inequality-and-poverty-indicators. Improved timeliness in the data production and the flash estimates using EUROMOD are part of a two-pillar strategy in order to ensure more recent data for income indicators for policy making. The use of the EUROMOD model for the provision of near-real time information on income indicators is therefore critical in the context of the European Semester. The JRC uses the model in cooperation with policy DGs, in particular DG ECFIN, DG TAXUD, DG EMPL and the SRSS. Since 2015 the JRC contributes to the preparation of the Country reports for the European Semester and produces regular notes also circulated in other policy DGs (the so-called “In-depth analyses of tax reforms using the EUROMOD model”). These notes were extensively used in the Country reports of the European Semester. EUROMOD has also been used for the Social Impact Assessment of the third Greek Stabilisation programme in cooperation with DG EMPL and DG REFORM for the assessment of the reform of the personal income system in Greece in 2015 and 2016. EUROMOD has also been used to provide technical assistance to the Greek Ministry of Finance (2018-2021) and it is currently being used for technical support to Romania, Lithuania and Slovakia (since 2020).

Work with DG TAXUD extended the model to improve the coverage of wealth taxation and for future analyses of tax shifting between corporate income taxes and personal income taxes. The model has been extended to account for labour supply adjustment combining EUROMOD and an econometrically estimated labour supply model. This extension covers all the EU Member States. The JRC is also currently extending the model to cover consumption taxation (VAT and excises). The model provided also input to a study on the fiscal impact of migration (2020) in cooperation with IIASA.

The JRC has developed a "simplified" version of EUROMOD, based on a web interface, which can be accessed upon request by researchers and policy analysts.

EUROMOD has been used extensively to assess, among others, the extent to which policy responses to the COVID-19 crisis in Member States have cushioned household incomes losses during the pandemic. The Commission Staff Working Documents analysing the recovery and resilience plans of several Member States (June 2021) cite this work.

• Economy, finance and the euro