OECD tax-benefit model

The tax-benefit model (TaxBEN) is the cross-country tax and benefit simulation model developed and maintained by the OECD. It is a unique tool for exploring the detailed mechanics of tax-benefit policies and reforms on working age individuals and their families across countries. The scope of TaxBEN includes taxes and social benefits that, together, account for a large share of government budgets. The model is mantained thanks to the grant agreement between the OECD and the European Commission. DG EMPL is the main contributor to the model, which also receives financial support by DG ECFIN. In the past also DG TAXUD contributed to the maintenance of the model.

TaxBEN produces policy indicators on household incomes, labour costs and work incentives in different family situations and policy settings. It covers a broad set of income-support and tax policies going back to early 2000s for all EU countries. The model draws on a comprehensive library of tax and benefit policy rules that are relevant for working-age individuals and their families.

Model updates have been undertaken annually with full results for the current year typically available internally before the end of the calendar year and disseminated to the users soon after. Updates benefit from the direct involvement of the European Commission from ministries and other government institutions, who provide up-to-date policy information and ensuring the accuracy of results. To maintain a consistent time series for policy monitoring and analysis, any changes or corrections to the tax and benefit calculations are systematically back-dated to earlier policy years as relevant.

For a complete overview of TaxBEN readers are invited to consult "TaxBEN: The OECD tax-benefit simulation model Methodology, user guide and policy applications", December 2020 (https://www.oecd.org/social/benefits-and-wages/OECD-TaxBEN-methodology-and-manual.pdf).

TaxBEN follows a “hypothetical family” approach, that is to say, it calculates tax liabilities and benefit entitlements for a broad set of stylised families (sometimes referred to as “vignettes”) whose characteristics are relevant from a policy perspective. The hypothetical family approach does not require the use of survey or administrative microdata, which are typically available only with significant time lags or are difficult to access. The focus on stylised but policy-relevant households enables broad country coverage, timely results and model use by a broad range of users without a need to apply for access to household micro-data, but at the same time results based on the TaxBEN model are not representative for the whole population.

The model covers insurance benefits, assistance and universal benefits, including unemployment, minimum-income, housing and in-work benefits, as well as cash family support. On the tax side, TaxBEN incorporates personal income taxes as well as mandatory social contributions, non-tax compulsory payments and payroll taxes. Childcare fees and benefits for parents using centre-based childcare and disability benefits are included for selected countries and policy years. The most important policy areas that currently remain outside the scope of the model are direct taxes on wealth (e.g. taxes on immovable and movable property, including council tax at a local level), indirect taxes (e.g. VAT), early-retirement and retirement benefits, and in-kind transfers (e.g. subsidised housing, transport and health care). Sickness benefits and short-time working benefits (partial unemployment benefits and similar job-retention measures) were included in the policy library in 2020 and may be added to the model in the future.

The modelling relies on a consistent set of assumptions across countries and uses official information on policy parameters that is provided and validated through country delegates of relevant OECD Working Parties.

For each country every year the OECD develops country documents describing in detail the policy rules and parameters they apply in a selected policy year to calculate tax and benefit amounts for the families and labour market circumstances that are within the scope of the tax-benefit model. The reports are validated through country delegates of relevant OECD Working Parties. They use a standardised format to facilitate cross-country comparisons and monitoring of policy reforms over time. They also provide clear links between policy descriptions and model’s parameters, as well standardized output from the Tax-benefit model. For particularly complicated policy mechanisms, the reports may include also boxes or charts with detailed step-by-step calculations of specific benefit or tax amounts.

Another input to the model are earnings decile points for full time employees in absolute terms and in % of the average wage, by gender. Earnings distribution data, as well as earnings of full-time minimum-wage workers, enable the calculation of indicator values at different points in the country-specific earnings distribution. These data are derived from the OECD Earnings Database and adapted to the TaxBEN model.