Exercise - University of Essex
Exercise 5: Reforming income tax in the UK (using SchedCalc)Uses: Analyse the structure of the personal income tax in the UK focusing on the personal allowance policy (tinta_uk) and the income tax policy (tin_uk)Perform a reform in UKMOD that involves modifying the existing SchedCalc for England, Wales and Northern Ireland to make it the same as for ScotlandDefine custom income tax bands/thresholds by modifying and/or adding constant variables in DefConst.Description:The Scotland Act 2016, provided the Scottish Parliament for the first time the power to set all income tax rates and bands (except the personal allowance, which remains reserved) that will apply to Scottish taxpayers' non-savings non-dividend (NSND) income starting from tax year 2016-17.The table below summarises the NSND income tax bands for tax year 2018/2019 excluding personal allowance:Taxable income(England, Wales and Northern Ireland)Rate of tax?0 - ?34,50020% (basic rate)?34,501 - ?150,00040% (higher rate)Over ?150,00145% (additional rate)Taxable income (Scotland)Rate of tax?0 - ?2,00019% (starter rate)?2,001- ?12,15020% (basic rate)?12,151- ?31,58021% (intermediate rate)?31,581 - ?150,00041% (higher rate)over ?150,00046% (top rate)This reform is currently implemented in the UK model, but you are asked to explore what the impact of that reform would have been if it was adopted UK-wide. You are asked to reform the rest of the UK (rUK) income tax thresholds to match the Scottish ones and analyse its distributive impact.General guidelines:- Create a new system based on the UK 2018/19 system and name it uk_2018_e5- Modify the Income Tax policy (tin_uk)for the rUK, particularly the elements defining income tax thresholds in (SchedCalc) to match the Scottish bands [HINT: income tax thresholds are defined as constant in DefConst using a “conditional” option: try to modify this part to account for the reform]- Run UKMOD to produce micro-data outputs.- Analyse the distributional impact of the reform using uk_2017_a1 dataFurther guidelines:1. Income tax band values are defined for the rest of the UK (rUK) and Scotland in DefConst (see constants $ITThresh?)2. You can use the same constants names for implementing your reform.3. You will not need to define a separate band for the upper band (over ?150,000). The way SchedCalc works, it takes the latest upper limit threshold and uses it as the lower limit for the last band.Exercise 5: Reforming income tax in the UK (using SchedCalc)Step-by-step solution and further information:Step 1: Creating a new systemOur first task is to open UK and create a new system using the 2018 system as a base. Give the name uk_2018_e5 to the new system. Also, set Conditional formatting in such a way that the 2018 system is the base one and hide all systems but these two - 2018 and 2018_e5 (see exercise 1 for explanation).Step 2: Analysing the current policyAccess the Income Tax policy in the UK (tin_uk). Consider year 2018. Hide other years (Figure 2a).Figure 2aAnalyse:? Where personal tax allowance and personal income tax is calculated. ? Where the tax base is calculated ? Establish where the tax schedule is implemented. ? Establish what are the relevant output variables. Hints:Income concepts are defined in a common policy ilDef_uk at the top of the spine.Explore how personal income tax is calculated:Policy tinta_uk calculate personal income tax allowancePolicy tin_uk computes personal income tax.Explore how they work, what are the relevant output variables and how they interact with the rest of the tax-benefit system.Further information can be found in the Country Report (see ).Step 3: Reforming the policyLocate the relevant SchedCalc (Schedule Calculator) by checking the comment column and the implementation. Expand it by clicking on the arrow on the left hand side of the function.Figure 3a: NSND income tax calculation in 2018/19 (tin_uk)There are two SchedCalc functions one for Scotland and one for the rUK. The income tax base is defined by il_Taxabley_NSND (for details of the components of the income list il_Taxabley_NSND, see policies tin_uk and IlDef_uk).In Scotland there are 5 income bands, while for the rUK there are 3. The following income tax rates apply outside Scotland:the first band rate (band_uplim, Grp/No 1) is taxed with a rate of 20%the second band rate (band_uplim, Grp/No 2) is taxed with a rate of 40%the third band rate (Grp/No 3, definition of band_uplim not needed) is taxed with a rate of 45%To find out the tax band values, hover over $ITThresh2 and $ITThresh3 (Figure 3b):Figure 3b Check constants values using the hovering over function of UKMOD$ITThresh2 and $ITThresh3 values are defined at the beginning of the spine by policy ConstDef_uk. One way to find where exactly each constant is defined and used is to search (Ctrl+F) for $ITThresh2.$ITThresh1-5 are constants defined as part of the Income tax Constants (Figure 3c):$ITThresh1: threshold for starting rate for savings$ITThresh2: upper bound of basic rate for non-savings-non-dividend income$ITThresh3: upper bound of higher rate for non-savings-non-dividend income$ITThresh4: upper bound of starter rate for non-savings-non-dividend income in Scotland$ITThresh5: upper bound of intermediate rate for non-savings-non-dividend income in Scotland.Figure 3c Income tax constants definition in ConstDef_ukYou can see that for the rUK only Thresholds 1 to 3 are currently defined (note that thresholds 4-5 are already defined but set to zero: they are used for Scotland only in the baseline).Move on to work on your uk_2018_e5 system now. Start by making a copy of the UK_2018 system and populating the $ITThresh1-5 with the new threshold amounts. Once you are done, it should look like shown in Figure 3d.NOTE 1: changes should apply only to NSND income tax. Savings & dividend income tax is not a devolved powered to Scotland.NOTE 2: the income tax bands values refer to taxable income after personal tax allowance has been deducted.NOTE 3: In order to maintain consistency with tax band names before the introduction of 5 tax rates in Scotland, $ITThresh2 and $ITThresh3 were kept as the two biggest thresholds, with $ITThresh4 and $ITThresh5 added for the 2 new smaller thresholds. The counter-intuitive ordering requires some attention on how constants names are used within the SchedCalc function.Figure 3d2979420292925500426720288353600Next, we need to modify the tin_uk policy to reference these new thresholds, by adding two new Band_UpLim and two Band_Rate parameter to the existing SchedCalc function for the rUK (Figures 3e – 3g)Figure 3e: Add parameters window for SchedCalc function01786255000133667500Adjust values in Grp/No column for the new parameters making sure that each rate links to the correct upper band limit as shown in Figure 3f below.Figure 3f1752600163830000Figure 3g: Modify the reform system to include the new tax schedule for the rUK Step 4: Produce and analyse micro-data outputRun UKMOD in order to produce micro-output for the baseline (uk_2018) and new system (uk_2018_e5) using the uk_2017_a1 data. Then use the Statistics Presenter Tool (UKMOD Statistics – baseline/reform) to analyse differences in benefits and disposable income due to the changes. ***If you need any additional information regarding any of the things mentioned above, you can easily access the EUROMOD Help & Info (the last tab in the ribbon bar), click on the Help and type the word(s) in the search tab and/or you can continue with exercises.SolutionUKMOD Statistics - Baseline vs ReformsResults for United Kingdom: uk_2018 vs uk_2018_e5Market incomes and fiscal overviewYearly, mill., currency as defined in EM outputuk_2018 Amounts (base)uk_2018_e5 AmountsDifference to baseTotal market incomes1,032,378.821,032,378.820.00... employment and self-employment income893,808.39893,808.390.00... other sources138,570.43138,570.430.00Government revenue through taxes and National Insurance contributions355,455.98360,744.515,288.53... direct taxes195,147.79200,436.315,288.53(simulated taxes)000...... Personal Income Tax158,969.83164,258.365,288.53Government expenditure on benefits and tax credits196,090.89196,088.99-1.90... means-tested non-pension benefits59,041.6759,039.78-1.90Pension Credit3,920.233,920.14-0.10Housing Benefit14,482.1914,480.75-1.44Council Tax Reduction4,225.514,224.22-1.28Universal Credit11,749.8511,750.750.90(-) Benefit cap (reducing Housing Benefit)277.66277.64-0.03(-) Benefit cap (reducing Universal Credit)100.35100.350.00Basic Poverty Indices using a fixed poverty linePoverty Rates for uk_2018 (base)Poverty Rates for uk_2018_e5Difference to basePoverty headcount by population group:000 All16.44%16.44%0.00pp Children20.63%20.63%0.00pp Adults14.35%14.35%0.00pp Adults Economically Active6.66%6.66%0.00pp Elderly18.65%18.65%0.00ppPoverty Gap18.57%18.57%0.00ppFixed Poverty Line319.8200Basic Poverty Indices using a floating poverty linePoverty Rates for uk_2018 (base)Poverty Rates for uk_2018_e5Difference to basePoverty headcount by population group:000 All16.44%16.36%-0.08pp Children20.63%20.57%-0.06pp Adults14.35%14.25%-0.09pp Adults Economically Active6.66%6.62%-0.04pp Elderly18.65%18.57%-0.08ppPoverty Gap18.57%18.66%0.09ppPoverty Line319.82319.56-0.26 ................
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