Forecasting tax revenues in the Netherlands

Eugene Verkade (e.m.verkade@cpb.nl) Seminar on Best Practices in Forecasting Public Revenues Statec , 27 January 2012

Overview
The macro economic forecasting process (at CPB) The role of estimating Dutch tax revenues Actual process of tax revenue forecasting
BIMBAM-model approach use of expert opinion use of realization figures

Summary and conclusions

CPB Netherlands Bureau for Economic Policy Analysis 2

Forecasting Dutch tax revenues

27 January 2012

Macro economic forecasts, when, why and for whom?

Short-term forecasts (1-2 years ahead) Four times a year budget cycle (for next years policy changes) Medium-term forecasts (4 to 5 years ahead) Medium-term economic outlook Election platforms Coalition agreement Policy preparation, analysis and research Note : CPB provides independent forecasts and policy research
CPB Netherlands Bureau for Economic Policy Analysis 3 Forecasting Dutch tax revenues 27 January 2012

Economic Forecasting. an interactive estimation process

Rest of the World Labour market Energy Construction

Govt spending Tax revenue

Macroeconomic model
Incomes and prices

Social security
CPB Netherlands Bureau for Economic Policy Analysis

Health care

Modelling tax revenues

National Accounts definition (EMU) vs. Ministry of Finance defintion Economic relevance vs. policy relevance Policy effects vs. endogenous effects

CPB uses 2 models : MIMOSI : wage and income tax , social security contributions BIMBAM : all other taxes

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Forecasting Dutch tax revenues

27 January 2012

Overview main tax categories (NA value)

2010 bln euro % GDP 2010 bln euro % GDP

Value added tax Wage tax Corporate tax Excises Environmental levies Motor vehicle tax Motor vehicle purchase tax Conveyance tax Real estate property tax

42.7 46.1 12.8 11.1 8.5 5.2 2.1 2.8 3.0

7.2% 7.8% 2.2% 1.9% 1.4% 0.9% 0.4% 0.5% 0.5%

Dividend tax Import duties Income tax Inheritance tax Wealth tax Insurance tax Other taxes

3.1 1.8 2.1 1.7 0.0 0.9 2.1

0.5% 0.3% 0.4% 0.3% 0.0% 0.1% 0.4%

Total tax revenues

146.0

24.8%

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Forecasting Dutch tax revenues

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50%

% GDP

Share of taxes

and social security contributions in GDP

45%

40%

35%

30%

25%

20%

15%

10%

Total taxes

5%

Total social security contributions

Total taxes + ssc

0% 1970 1980 1990

year

2000

2010

CPB Netherlands Bureau for Economic Policy Analysis

12%

% of GDP

Tax share in GDP

10%

wage and income taxes VAT corporate taxes other taxes

8%

6%

4%

2%

0% 1970 1980 1990

year

2000

2010

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Forecasting Dutch tax revenues

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Forecasting process
1. List all new budgetary policy measures close cooperation with the Ministry of Finance) 2. Estimate the ex ante impact of each measure (model input) 3. Collect latest monthly tax data (in

4. Bring in the most recent macro economic forecast 5. Estimating future tax revenues following these latest forecast run) 6. Expert judgement on model outcomes 7. Results go back to macro model step 4-7 will be repeated during several rounds
CPB Netherlands Bureau for Economic Policy Analysis 9

(model

Forecasting Dutch tax revenues

27 January 2012

Forecast tax revenue per category

revenue (T-1) + (a) policy effect + (b) endogenous effect + (c) adjustment + (d) forecast error (for the past) _________________ = revenue (T) ( ( ( ( exogenous in mln ) endogenous ) exogenous in mln ) if relevant )

hence : (a) crucial expert judgement, determined outside model (b) guarantees consistency with latest economic forecast (c) and (d) only if necessary
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Modelling the endogenous effect

VAT : linked to disaggregated demand
(private consumption by sector, investment, etc)

income tax

: MIMOSI model

(next slide)

corporate tax : rather problematic , highly relevant

(related to non wage income , but impact of loss compensation)

most other taxes : most linked to overall GDP growth

(ex post adjustment)

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Forecasting Dutch tax revenues

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The MIMOSI model

to calculate wage and income tax and for social security contributions based on micro data base overview of taxable income on households, major items on deduction pure bookkeeping model (behavioral reactions come from macro models)

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Forecasting Dutch tax revenues

27 January 2012

Monthly monitor
Tax authorities provides monthly cash figures up to previous month These monthly figures are highly volatile
(unclear seasonal pattern)

Therefore, additional information with limited impact on year forecast

NA figures follow cash figures with one month lag for most taxes
(for some taxes no lag)

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Forecasting Dutch tax revenues

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Summary and conclusions

BIMBAM is a rather large, detailed model with many different taxes included. but only a few really matter for budget balance Distinction between policy effects and endogenous effect useful for policy making process Quality of forecasts depend on the quality and suitability of inputs Forecasting corporate tax remains a challenge Estimating is not a mechanical process: important role for plausibility checks

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Forecasting Dutch tax revenues

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Thank you for your attention

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Forecasting Dutch tax revenues

27 January 2012