Microsimulation related to planned changes of Austrian family tax credit “family bonus”

PROJECT CO-ORDINATOR

Tamara Premrov

PROJECT TEAM AT THE EUROPEAN CENTRE

Michael Fuchs

AIMS

The microsimulation analysis related to three scenarios:


1. Regulations as in 2018 prior to the introduction of “family bonus”: This hypothetical scenario reflects the Austrian policy system in the year 2020, if no family bonus had been introduced and thus, child tax allowance (EUR 440 per child and year or EUR 300 for each parent if they share the tax allowance) and tax deduction of child care costs (up to yearly EUR 2,300 per child) were still in place.

2. Current policy regulations 2020 (ÖVP/FPÖ-government): This scenario represents the status quo: Parents can deduct up to EUR 1,500 per year and child (children >17 entitled to family allowance: up to EUR 500) from income tax as long as they earn sufficient income providing sufficient (positive) tax liability to be deducted from. Beside, only single earners and single parents with low incomes are entitled to a related negative tax of EUR 250 per child.

3. Planned reform of “family bonus” in 2022 according to the new government programme (ÖVP/Greens-government): The scenario foresees an increase of the maximum value of the “family bonus” for children <18 from yearly 1,500 to 1,750 Euro as well as the increase of the negative tax from yearly EUR 250 to EUR 350 plus its extension to all low income families.

METHODS

For the analysis, the tax-/benefit microsimulation model EUROMOD/SORESI based on latest EU-SILC 2018-data (indexed to 2020) has been used. Only those policies were adapted which related to the introduction and extension of the “family bonus”. Thus, the net distribution effects of the (planned) reforms could be mirrored. For all scenarios a full, and for the individual household optimal take-up of policies was assumed. In addition the simulation assumed – as far as this is possible under the assumption of optimisation – that the benefits of the “family bonus” were claimed by both parents on equal terms. The distributional consequences of the (planned) reforms have been expressed both in comparison to the policy system prior to the introduction of the “family bonus” and in comparison to the regulations in the status quo.

FINDINGS

The planned extension of the “family bonus” by the ÖVP/Greens-government is more considerate of the lowest income-class than the current ÖVP/FPÖ-policy. However, low-income earners remain disadvantaged compared to the middle class. In detail, the planned additional relief would benefit the households in the lowest income decile with a share of 5.3%. In the current version, the share is only 3.3%. However, with shares of 12 to 14% the three middle income deciles can expect the lion's share of the planned additional relief. In absolute numbers the relief by the ÖVP/Greens-government will on average benefit the lowest income decile with EUR 40 per household and year. On the contrary, the middle income classes can expect an income increase of up to EUR 108 (the calculations refer to all households incl. those without children). If the reform steps of both governments are counted together, the third income decile (from the bottom) is the highest beneficiary with a share of 14.8% of the total relief. Also, here the lowest income decile benefits least with a share of 3.7%. Both reform steps together will reduce the income tax liability by around 1.6 billion EUR per year, thereof the planned extension by 0.3 billion.

It can be concluded that the “family bonus” remains tailored to the middle class. Although the increased negative tax provides also an improvement for low income earners, the model does not represent a targeted instrument to combat (child) poverty. However, the tax credit might also be regarded as an instrument to relieve the burden of current tax payers and provides for a horizontal redistribution from income earners without children to income earners (of the same income level) with children.