Welfare Effects of Alternative Financing of Social Security: Some Calculations for Belgium

Abstract

We analyse the distributional impact of lowering social security contributions and compensating the revenue loss by an increase in indirect taxes. We empirically assess the distributional consequences of this shift by using two Belgian microsimulation models: MODÉTÉ for the tax benefit system, and aster for the indirect tax part. Since the underlying micro database of the tax benefit system does not contain expenditures, we first impute detailed expenditures in the income data survey, by means of semiparametric Engelcurves. The currently living generation of pensioners belongs to the losers by such a reform: They do not profit from the reduced tax on labour income, but pay higher consumption prices. Less obvious, also part of the working population loses. Even not all those who leave unemployment after the reform are gainers. We also investigate the sensitivity of the results w.r.t. the choice of welfare measure to assess the combined change in disposable income, consumer prices and - in the case of flexible labour supply - leisure. We show how the specific choice and parameters of the welfare measure will influence the conclusions, possibly even more than the predictive model for assessing the behavioural reactions in labour supply.

Keywords: microsimulation, social security contributions, demand system, indirect taxes, labour supply

JEL Classification: D12, H31, H55, J22