Annex 4 analytical methods

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.

The main core outputs of the TaxBEN model include:     

• Net household income and individual income components for selected family types and labour market circumstances.
• Headline policy indicators of tax burdens, benefit generosity, work incentives.
• Comparable information on the distribution of earnings by gender and on the annual statutory minimum wages of full-time workers. This information is directly incorporated in the TaxBEN model.

The European Commission has supported TaxBEN since 2002. Results provide inputs into EC flagship publications (such as the different editions of the Employment and Social Development in Europe report by DG EMPL [1] and the in the Taxation Trends in the European Union report [2] by DG TAXUD), the European Semester country reports and recommendations, as well as a number of Commission publications and databases that provide monitoring capabilities in the context of key convergence objectives, such as the European Pillar of Social Rights. TaxBEN also features regularly in analytical reports and studies undertaken, commissioned or supported by the European Commission.

More precisely, the European Commission uses the tax and benefit indicators produced by TaxBEN in the context of  the European Semester and for benchmarking of tax wedge (DG ECFIN), minimum income (DG EMPL), unemployment benefit (DG EMPL) and minimum wage (DG EMPL). In addition, the Social Scoreboard contains one indicator (net earnings of a full-time single worker without children earning an average wage) based on it. Finally TaxBEN has also been used for the impact assessment on the Directive on “Adequate minimum wages for workers across Member States”, which Commission proposal was published on 28 October 2020.

Tax and benefits indicators based on the TaxBEN model are available in the European Commission database (https://europa.eu/economy_finance/db_indicators/tab/) and in a restricted set in the Eurostat database (https://ec.europa.eu/eurostat/data/database)

[1] https://ec.europa.eu/social/main.jsp?advSearchKey=esdereport&mode=advancedSubmit&catId=22&policyArea=0&policyAreaSub=0&country=0&year=0

[2] https://ec.europa.eu/taxation_customs/business/economic-analysis-taxation/taxation-trends-eu-union_en

• Economy, finance and the euro 
• Taxation 
• Employment and social affairs