Fiscal Modelling

1. Fiscal Modelling Graeme Roy Fiscal Analysis Branch Office of the Chief Economic Adviser

2. Introduction • Work of the Branch • Modelling • Personal taxation and benefits • Business taxation • Individual sectors – e.g. Energy

3. Personal taxation and benefits • MOSH - Microsimulation of Scottish Households • Analyse the effect of change in policy on Scottish households • Calculate each households tax liability and benefit entitlement under different tax systems • Gross up the results so that they are representative of the population as a whole. • Analyse the distributional impact of tax & benefit changes

4. How does the model work?

5. Why is it Useful? • Based on each household’s characteristics their tax liability, benefit entitlement and net income is calculated • Using this information we can then estimate… • Revenue raised from specific taxes • Expenditure on different benefits • Household net income under different scenarios • Results can be stratified by household type/income decile • Differential take up rates

6. Abolishing the 10p Starting RateAverage Change in Equivalised Net Income 1.6% 1.2% 0.8% 0.4% 0.0% -0.4% Bottom 20% Quintile 2 Quintile 3 Quintile 4 Richest 20% Income Distribution Income Tax Changes

7. Abolishing the 10p Starting RateAverage Change in Equivalised Net Income 1.6% 1.2% 0.8% 0.4% 0.0% -0.4% Bottom 20% Quintile 2 Quintile 3 Quintile 4 Richest 20% Income Distribution Income Tax Changes ..including Benefit Changes

8. Abolishing the 10p Starting RateAverage Change in Equivalised Net Income

9. Abolishing the 10p Starting Rate Number of households worse off 250,000 200,000 150,000 100,000 50,000 0 Bottom 20% Quintile 2 Quintile 3 Quintile 4 Richest 20% Income Distribution Income Tax Changes

10. Abolishing the 10p Starting Rate Number of households worse off 250,000 200,000 150,000 100,000 50,000 0 Bottom 20% Quintile 2 Quintile 3 Quintile 4 Richest 20% Income Distribution Income Tax Changes ..including Benefit Changes

11. Abolishing the 10p Starting Rate Number of households worse off 250,000 200,000 150,000 100,000 50,000 0 Bottom 20% Quintile 2 Quintile 3 Quintile 4 Richest 20% Income Distribution Income Tax Changes ..including Benefit Changes ...including higher personal allowances

12. Additional Work • TABOSH • Tax and benefit calculator for Scottish households • Based on specified characteristics what taxes are paid and benefits received. • Example: ‘Incentives to work’ – • How much does an adult’s net income change by when they work longer hours

13. Incentives for labour market participation

14. Additional Work • TABOSH • Tax and benefit calculator for Scottish households • Based on specified characteristics what taxes are paid and benefits received. • BABOSH • Tax calculator for Scottish businesses • Based on specified characteristics (e.g. turnover, number of employees) what taxes are paid and benefits received • Marginal & Effective tax rates

15. Corporation Tax

16. Future Work • Dynamic Analysis • Household response to tax changes • Long term trends: changes in demographics