(Unit: KRW billion, %) Budget General Special Funds Total Subtotal Account Account 544,751 544,751 544,751 Local Tax - - (42.5) (37.0) (36.6) Non-tax 86,698 125,351 212,049 7,015 219,064 Revenue (6.8) (65.9) (14.4) (42.5) (14.7) Revenue 315,932 74 316,006 316,006 - Sharing (24.6) (0.1) (21.5) (21.2) 316,655 59,929 376,584 11 376,595 Grant (24.7) (31.5) (25.6) (0.1) (25.3) 18,124 4,806 22,930 9,462 32,392 Others (1.4) (2.5) (1.5) (57.4) (2.2) 1,282,160 190,160 1,472,320 16,488 1,488,808 Total (100.0) (100.0) (100.0) (100.0) (100.0)
Source: Ministry of Interior, Korea.
Lack of a valid system of user charges could lead to a variety of economic problems. Since users are not charged, local governments must finance the costs of publicly provided services via public funds or budget. This means that local authorities, in essence, grant indirect subsidies to the users to the point of further raising their tax burden or causing fiscal deficits. The problem of unfairness arises since local public services are not equally consumed, thus the subsidies could get concentrated in a specific group. A more serious worry is the potential appearance of a crowd of users who compete for the free services, sending the wrong signal to government that the services are being undersupplied. More resources will then continue to be put into the services until their marginal utility reaches zero.
An important role of user charges is to make the users recognize that provision of the services is not free or without cost. Such recognition also helps the government understand which and how much of a service are needed in reality. Just like the market equilibrium price, user charges automatically match the burden to the benefits received. Revenue earned from user charges can reduce fiscal deficits, but a more important contribution is to enable efficient allocation of resources. This is why user charges must be imposed on those who benefit from the provision of certain public services. Efficient utilization of scarce public resources is crucial, especially in developing countries where public authorities tend to face a chronic shortage of financial resources. Proper development of user charges can thus help Algerian local governments solve their fiscal deficits and significantly
Chapter 1 _Enhancing Fiscal Revenue of Local Authorities in Algeria • 053 promote economic efficiency. In addition, successful implementation of user charges improves fairness since the tax burden of the general public decreases by the amount users pay for the benefit they receive.4)
Considering international practices, Algerian local governments need to raise the share of non-tax revenue up to 10~15percent of overall revenue. Another essential step is to diversify non-tax revenue sources in the process of raising revenue. A high volume of revenue has to be generated from user charges for publicly provided services and goods, including public utilities, water and public transportation. In Algeria, most publicly provided services are free or underpriced, thus the size of the indirect subsidies is estimated as huge. So rationalization of the prices of publicly provided goods and services is urgent. To normalize user charges, detailed information is first needed about the ratio of cost recovery of user charges and fees, then rationalization of prices should follow so that the country’s low ratio of cost recovery gets closer to the international average see
. A gradual process of rationalization is recommended to set up a successful system of user charges. The first step is the significant reduction of the size and types of free goods and services. The next step is to start charging for them. Finally, the prices of underpriced public services should be raised to a reasonable level.Then the task of setting a proper rate of cost recovery remains. The optimal level of user charges and fees is determined according to the characteristics of the services provided. Two criteria are important for imposing user charges. One is an indispensability principle to determine if the service is essential and fundamental. The other is an externality principle on whether the benefits of a service belongs to an individual or is spread to the public. If a service is indispensable or public (i.e., has a positive external effect), then its price should be relatively lower. That is, a relatively lower rate of cost recovery is recommended in that case. Four categories of publicly provided services can be conceived of as a conceptual classification. The first type is an essential public service with its benefits spreading to the public. In this case, the service needs to be priced as low as possible. The second type corresponds to a selective public service, which implies that a service is selective but its benefits spread to the public. Relatively low pricing is suggested here. The third type is an indispensable individual service whose benefits mostly affect an individual. Reasonable pricing in this case is for price to equal cost plus ordinary profit. The fourth type is a selective individual service. The service here is selective, with its benefits belonging to an individual quite similar to the situation of normal private goods. Then the service can be priced relatively high so that excess profit can be earned.
4) According to the OECD (2011), user charges can foster a more business-like and customer-oriented management, improve the financial and service performances of the supplier, and encourage the development of markets and competition.
054 • 2015/16 Knowledge Sharing Program with Algeria 5. Conclusion
This paper, as part of the second year of the KSP project, discussed local finance reform in Algeria with a focus on policy suggestions to enhance and diversify fiscal resources of local governments. Practical alternatives were thought up to develop and mobilize financial resources of such governments after reviewing their revenue structures.
To begin with, the low share (18.8 percent) of local tax revenue to that of ordinary tax needs to be raised consistently over the medium term up to the previous level (30%) of the mid-1990s. For transparent and efficient tax management, excessive items of local tax should be reduced in number. The six types of environmental tax and the wealth tax result in little revenue collection but incur high costs in implementation. A unified environmental tax is a reasonable alternative. From the perspective of tax policy and administration, the wealth tax is unsuitable for taxation at the municipal level and thus needs to be repealed or transferred to national tax. And to alleviate superposed taxation, a merger of different local taxes whose tax bases are completely the same is recommended (i.e., property (land), sanitation and housing tax).
The high share of TAP, which is economically inefficient and unequal in tax burden, requires a drastic reduction. Theoretically and practically, property tax is the best candidate to replace TAP. In Algeria, the administrative tax price rate of for land is known to remain low, below 10 percent of the market price. To normalize property taxation, the property tax needs to be gradually raised to 60~70 percent of the market price. Another pressing task is to enhance the low registration rate (39 percent) of land and buildings in urban areas. One method is the introduction of a voluntary reporting system. Tax exemptions for property also need revision. The 2015 revision of financial law repealed the seven-year tax exemption for new buildings, and similar measures need to continue to remove needless tax exemptions for property.
Measures are also need to boost other tax revenue to cover revenue loss from the downsizing of TAP. The first priority is the reduction of needless tax exemptions. A good example is to apply the housing tax to all 1,541 local communities, something made possible only since the 2015 revision of financial law. Streamlining of tax exemptions should consider the three factors of revenue loss, tax incidence and policy effectiveness. A formal system of reporting local tax expenditures is a prerequisite for overhauling tax relief.
Imposition of a new tax should come only after conducting rationalization within the existing tax system. Two types of new taxes could be suggested: a
Chapter 1 _Enhancing Fiscal Revenue of Local Authorities in Algeria • 055 “fire tax” and “urban planning tax.” In Algeria, legalization of the underground economy is not only at the top of the policy agenda, but also provides a straightforward way to expand fiscal revenue while simultaneously improving economic justice and equity. Policy experiences of Korea worth examination include the real-name financial transaction system, tax incentives to expand the use of credit cards and cash receipts, a voluntary reporting system for non-filed income and rewards for reporting tax evasion.
The low fiscal power of Algerian local governments is partly due to their undeveloped non-tax revenue, which takes up a negligible share (2 percent) of overall revenue. Not only is the size of non-tax revenue small, but its content remains rudimentary. No revenue is earned from user charges for publicly provided goods and services, while in many other countries, user charges serve as a leading financial resource of local authorities.
Considering international practices, Algerian local governments need to raise their share of non-tax revenue up to 10~15 percent of overall revenue. A high volume of revenue has to be generated from user charges for publicly provided services and goods, including water and public transportation. To normalize user charges, the first task is to collect detailed information about the ratio of cost recovery of user charges and fees and then rationalize the prices so that Algeria’s low ratio of cost recovery can get closer to the international average. A gradual process of rationalization is recommended to set up a successful system of user charges: i) first, the size and types of free services should be reduced, ii) charging for such goods and services should start and iii) finally, the prices of underpriced public services must be raised to a reasonable level. An optimal level of user charges and fees is determined based on the indispensability and externality of the services provided. For example, if the service is indispensable with its benefits spreading to the public, the price needs to be as low as possible. When the service is selective with its benefits belonging to an individual, the price can be set relatively high to earn excess profit.
056 • 2015/16 Knowledge Sharing Program with Algeria References
Bird, Richard M., "Subnational Taxation in Developing Countries: A Review of the Literature", World Bank, October 2010. ———, "User Charges in Local Government Finance", The Challenge of Urban Government, 2001, pp.171-182. ———, "Subnational Revenues: Realities and Prospects", Annual World Bank Conference on Development in Latin America and the Caribbean, 1999. Farvacque-Vitkovic, Catherine and Mihaly Kopanyi, Municipal Finances: A Handbook for Local Governments, Washing ton, DC: World Bank, 2014. IMF, "Algeria: 2013 ARTICLE IV CONSULTATION", IMF Country Report No. 14/32, February 2014. IMF, 2002. Interwies, E., Kampa, E., and Görlach, B., “Economic Instruments and Water Rights”, Background paper to the Integrated Water Resources Management: Course for North Africa, 2005. Kim, H., The taxation of immovable property in Korea, Korea Institute of Public Finance, 2013. KIPF, "An Overview of Taxation in Korea", 2015. KPMG, "Guide to Investing in Algeria", 2013. Ministry of Finance (Algeria), official fiscal data. Oates, W. E., "Taxation in a Federal System: The Tax Assignment Problem", Public Economics Review, Vol. 1, 1996, pp. 35-60. OECD, (ed.): Working Party on Biodiversity, Water and Ecosystems - Economic Instruments for Water Management, 2011. PWC, Paying Taxes 2014: The Global Picture, 2014. Stavins, R. N., “Experience with Market-based Environmental Policy Instruments”, Discussion Papper 01-58, Resources for the Future, 2001. OECD, “Best Practice Guidelines for User Charging for Government Services”, PUMA Policy Brief No. 3, Public Management Service, March, 1997. Farvacque-Vitkovic, Catherine and Mihaly Kopanyi, Municipal Finances: A Handbook for Local Governments, Washing ton, DC: World Bank, 2014. U.S. Census Bureau, State & Local Government Finance Summary Report, 2010.
Chapter 1 _Enhancing Fiscal Revenue of Local Authorities in Algeria • 057 Appendix
Appendix 1: Property Taxation in Korea
< Tax Revenues > (Unit: % of GDP)
1995 2000 2005 2006 2007 2008 2009 2010 KOREA 0.67 0.56 0.58 0.77 0.94 0.96 0.83 0.79 OECD 0.91 0.91 0.97 0.96 0.97 0.99 1.05 1.05 Note: * 4,100 recurrent taxes on immovable property. Source: OECD Revenue Statistics (2013).
< Pct. of Property Tax Revenue vs. Local Tax > (Unit: KRW billion)
2005 2006 2007 2008 2009 2010 Housing 967 1,055 1,259 1,546 1,285 1,494 Property Tax Building 561 724 799 773 862 931 (local) Land 1,265 1,661 2,062 2,469 2,686 2,839 Comprehensive Real Estate 441 1,328 2,414 2,130 1,207 - Holding Tax(National) Local tax 35,977 41,294 43,524 45,480 45,168 49,160 property tax/local tax*100(%) 8.99 11.55 15.01 15.21 13.37 10.71 Source: National Tax Service & Ministry of Interior, Korea.
< Major Reform of Korea’s Property Tax System (2005) >
- Two tracks of property taxes: Local (municipalities) & national - Major change in “valuation” & “assessment” for housing (land + building) - Strong political resistance avoided - Comprehensive tax on real estate holdings revised in 2009
Before the Tax Reform After the Tax Reform Comprehensive Composite land Property tax Property tax Real Estate tax Holding Tax building: land: 0.2~5%, 0.15~0.5%, 1.0~3.0%, Housing 0.3~7%, 9 levels 3 levels 3 levels 6 levels Objects Land for 0.2~5%, 0.2~0.5%, 1.0~4.0%, Non-Business 9 levels 3 levels 3 levels Land for 0.3~2%, 0.2~0.4%, 0.6~1.6%, Business 9 levels 3 levels 3 levels progressivity progressivity Taxation Method item (sum of items by item (sum of items by person) person) Source: Kim (2013).
058 • 2015/16 Knowledge Sharing Program with Algeria < Valuation Features >
- Central gov’t responsible for valuation - Valuation approach: cost of construction → sales comparisons - MoLIT updates “valuation ratio”; parliament decides ratios for assessment & coverage - Valuation data made public for transparency & fairness
< Valuation Methods >
Before 2005 After 2005(current) Tax Evaluation Evaluation Tax Item Assessment Assessment Classification agents and agents and ratio ratio method method MOLIT: - House: - Stamp tax, actual inheritance transaction land, building: tax·gift price MOPAS Acquisition tax(national local tax 'tax base 30~40% 100% Tax tax) - land, evaluated by building: current price' - acquisition 'appraised tax(local tax) value of standard land' MOLIT: - Property land, House, tax(local tax) building land 62% land building: Property - Comprehen- local tax MOLIT 30~50% 'posted price Tax sive real National tax 'appraised of house'& estate value of land' 'appraised holding tax house 58.7% value of (national tax) standard land' NTS: Land, House, Building land building: Capital Capital NTS - House: National tax 60~80% 80~100% Income Tax income tax 'standard Actual market price' transaction price 'standard market price' Source: Kim (2013).
Chapter 1 _Enhancing Fiscal Revenue of Local Authorities in Algeria • 059 Appendix
< Changes in Assessment Ratio Plan > (Unit: % / Property Tax)
Year 05 06 07 08 09 10 11 12 13 House 50 50 50 55 60 60 60 60 60 Land 50 55 60 65 70 70 70 70 70 Source: Kim (2013).
Year 05 06 07 08 09 10 11 12 13 House 50 70 80 80 80 80 80 80 80 Land 50 63 70 80 80 80 80 80 80 Source: Kim (2013).
060 • 2015/16 Knowledge Sharing Program with Algeria 2015/16 Knowledge Sharing Program with Algeria: Policy Consultation for Sustainable Growth in Algeria: Effects of Tax Policy and Revenue Enhancement Chapter 2
Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria
1. Introduction 2. Simulation Model 3. Model Calibration 4. Policy Simulations 5. Conclusion ■ Chapter 02
Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria
Young Jun Chun (Hanyang University)
Summary
We attempted to build a general equilibrium simulation model to study the socioeconomic effects of taxation in Algeria. We used a multi-income-class OLG model with multi-production sectors that enabled the analysis of the distributional effects of taxation, as well as the effects of differential taxation using varying effective tax rates across production sectors. The model was calibrated to reflect the economic and taxation policies of Algeria.
Using the calibrated model that reflected the characteristics of the Algerian economy and taxation system, we simulated its benchmark economy with partial success. Important macroeconomic variables computed in the model were close to actual values. However, the computed revenue proportions of a few tax bases did not accurately reflect the Algerian revenue structure, probably because the model did not adequately reflect certain exemptions and reductions. Our simulation also showed the potential capacity of the model in analyzing the redistributive effects of taxation. The progressivity of labor income tax is shown to have a heterogeneous effect on the distribution of labor, wealth accumulation, and consumption.
We simulated tax revision plans that reflected the requests from the Algerian government, including those on the revision of the VAT, corporate tax, labor income tax, and the Professional Activity Tax (TAP). The policy simulation results can be summarized as follows. First, government spending financed by a rise in VAT
062 • 2015/16 Knowledge Sharing Program with Algeria revenue resulting from a hike in the effective VAT rate was ineffective in improving macroeconomic variables, because the rise of the VAT rate elevated the post-tax prices of domestically produced goods and services. Second, lowering the corporate tax rate, which the Algerian government plans to do, was also ineffective in raising investment and GDP, because differential taxation across production sectors deteriorated. Third, the decrease in the progressivity of labor income taxation substantially improved macroeconomic variables but eroded the distribution of wealth and labor income. Finally, lowering the TAP rate boosted the efficiency of resource allocation. The TAP was imposed on intermediate inputs as well as on final demand. So the prices of domestically produced goods and services climbed cumulatively in the process of production. In addition, the TAP was imposed only on domestically produced goods and services. These aspects of the tax resulted in a distortion of resource allocation.
In addition to the policy experiments, we simulated a more fundamental tax reform. Structurally transforming taxation from being based on the labor income tax (or capital income tax) to being based on the consumption tax improved efficiency. The replacement of labor income tax with consumption tax, however, worsened the distribution of labor income and wealth.
1. Introduction
The purpose of this project is to evaluate the socioeconomic effects of Algeria’s tax policy using a general equilibrium model. The structure of the simulation model is that of the multi-income-class overlapping generations (OLG) with multi-production sectors. We adopted a multi-income class model because the redistributive effect is one of the most important aspects of taxation. The OLG model is a widely used framework for the analysis of taxation and a technically tractable model. We needed to divide the production sector into multi-sectors because differential taxation across production sectors is common. Different rates of tax and related incentives were applied to different production sectors.
The model was calibrated reflecting the economy and tax policies of Algeria. The taxes simulated included those on labor, capital and consumption.
The model is designed to assess behavioral changes due to shifts in tax policy. The labor income tax affects the labor supply and level of consumption spending. Capital income taxes at the individual level, such as interest income tax, affect savings behavior. Taxes on labor income and capital income have a heterogeneous effect across income classes if they are progressive. The corporate tax is levied on
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 063 capital income of firms and affects their investment. It has differing effects across industry groups if it has different specifications for each group. Consumption taxes including VAT, excise tax, import tariffs and export tax affect consumption level, its composition, import-export volume and their proportion.
The simulation of tax policy reveals its effects on macroeconomic variables such as GDP, imports, exports, tax revenue, foreign exchange rate, wage levels and the rate of return, and the redistributive effects of tax policy such as on the levels of income, consumption and wealth. The simulation is able to identify the effects of tax policy on investment, employment and production across industry groups.
The analysis of the socioeconomic effects of taxation was not tried using the MEGA (Modele d'Equilibre General pour l'Algerie, General Equilibrium Model for Algeria) model, the one being used by the Algerian government, because it did not reflect the tax policies in the model. This analysis could not use a structural VAR model because the specification of tax policies is not usually identifiable with tax data. For example, tax data in most countries lack detailed information about tax expenditures, which covers tax cuts for investment, reduction of consumption and labor income taxes, and wage subsidies.
Using the model calibrated reflecting the characteristics of the Algerian economy and tax system, we simulated its benchmark economy with partial success. Some of key variables computed in the model were close to the actual values: (i) the ratios of tax revenue and exports to GDP were close to the actual ratios; and (ii) the shares of labor income tax, capital income, oil tax, and TAP (Professional Activity Tax) were close to the actual values. The computed revenue proportion of the consumption tax on domestic and imported goods and corporate tax rate did not reflect the Algerian revenue structure well, probably because the model did not properly reflect exemptions and reductions for these taxes. Our simulation also showed the potential capability of the model in analyzing the redistributive effects of taxation. The progressivity of labor income tax is shown to have a heterogeneous effect on the distribution of labor supply, wealth accumulation and consumption.
We tried policy experiments with the simulation model, reflecting requests from the Algerian government. The simulated policies comprised revisions to value- added tax, corporate and income tax and TAP. The revisions of the simulated value- added tax (VAT) were mainly composed of adjustments of tax exemptions and cuts. The simulation of corporate tax revisions were related to changes in the tax rate. The simulation of income tax focused on the adjustment of progressivity. Finally, we simulated the change in tax rate of TAP, a tax imposed on firm's sales. The policy simulation results are summarized as follows. First, the rise in
064 • 2015/16 Knowledge Sharing Program with Algeria government spending financed by the hike in VAT revenue resulting from the increase in the VAT rate, based on the revised plan of the Algerian government, proved ineffective in improving macroeconomic variables. This is because the hike in the VAT rate raised the after-tax price of domestically produced goods and services. Second, the cut in the corporate tax rate, which the Algerian government plans to implement, was also ineffective in raising investment and GDP because differential taxation across production sectors deteriorated. Third, the decrease in the progressivity of labor income taxation substantially improved macroeconomic variables but also eroded the distribution of wealth and labor income. Finally, lowering the TAP rate improved the efficiency of resource allocation. TAP was imposed on intermediate inputs as well as final demand. So the prices of domestically produced goods and services cumulatively rose in the production process. In addition, PAT was imposed only on domestically produced goods and services. These tax aspects resulted in the distortion of resource allocation.
In addition to policy experiments, we simulated more fundamental tax reform. The structural transformation of taxation from a system based on the labor income tax (or based on capital income tax) to one based on consumption tax raised efficiency. The replacement of the labor income tax with that of consumption, however, worsened the distribution of labor income and wealth.
The remainder of this paper is organized as follows. Section 2 will explain the simulation model. Section 3 will present calibration of the model. Section 4 will present the results of the simulations, including computing the benchmark economy, and an explanation of the policy simulation plan. Finally, Section 5 will conclude this discussion.
2. Simulation Model1)
The simulation model consisted of four sectors: households, firms, government and other countries.
1) Tax policy simulation using a general equilibrium model started with Shoven and Walley (1972). They set up a representative agent model with multiple production sectors for the analysis of differential taxation across production sectors. The research following the seminal paper used the representative agent model for the analysis of taxation (Shoven and Walley, 1973, 1984), trade policies (Shoven and Walley (1984), Bouet, Antoine (2008), Piermartini and Teh (2005), and income distribution issues (Adelman and Robinson (1978), Bouet, Antoine (2008)). Tax simulation analysis using a OLG model started with Auerbach et al. (1983). They set up a 55-generation model to study the effects of tax base change from income to consumption. Auerbach and Kotlkoff (1987) extended the OLG model to study issues related to population aging, pension policy, fiscal deficit and progressive taxation. Our model is close to that of Fullerton and Rogers (1993), which extended the model of Auerbach and Kotlikoff to that of a multi-income class with multiple production sectors to study the effects of U.S. tax policy. The difference between their model and ours is that ours uses an open economy while that of Fullerton and Rogers uses a closed economy.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 065 2.1. Households
The household sector consist of five income classes. The classification of income class is based on non-capital income (labor and business income). In each class, 60 cohorts between the ages of 21 and 80 coexist. Those under age 21 are assumed to make no decisions on consumption and savings. When they turn 21, they start to make decisions. No mortality risk is also assumed, and everyone is to live up to 80 years old. The maximum age is based on the assumption of a life expectancy of about 80 years. People in this economy maximize the lifetime discounted utility defined in Equation (1). The subscripts for income classes and time are omitted unless mentioned otherwise.
(1)
where a is age-20, c refers to the composite consumption of I kinds of consumption goods, l represents leisure, which is total discretionary time minus labor hours, and β is the discount factor.
The composite consumption, c, is defined as the Cobb-Douglas function of I consumption goods (Equation (2)).
(2)
where is the consumption share of good . αi i
The decision-making of individuals consists of three steps. Step 1: Decision on consumption expenditures and labor (leisure) over lifetime Step 2: Decision on allocation of consumption goods Step 3: Decision on allocation between domestic and imported goods
• Step 1: Decision on consumption expenditures and labor over lifetime
The optimization problem in this step can be summarized as follows:
(3)
066 • 2015/16 Knowledge Sharing Program with Algeria where w, r and p are the wage and interest rates and the price of the composite consumption good. and are the rates of labor income tax and capital income l k tax.
Individuals maximize the lifetime discounted utility, which is defined as the CRRA (constant relative risk aversion) function nested with the Cobb-Douglas function of consumption and leisure. γ is the relative risk aversion parameter (the inverse of the inter-temporal substitution elasticity), and θ is the share of leisure in the Cobb- Douglas utility function.
The resource constraint is the lifetime resource constraint of the present value of after-tax labor income, wα(1-lα)(1- αl) , being not less than that of consumption expenditures (pcα). The discount rate for computation of the present value is the after-tax rate of return to capital (r(1- k)).
The solution for Problem (3) is as follows:
(4)
(5)
(6)
Equation (4) shows the intra-temporal substitution between leisure and consumption. The price of the composite consumption (p) and after-tax wage rate, wα(1- αl), represents the opportunity cost of consumption and leisure, respectively. The ratio of leisure and consumption depends on that of opportunity cost. The determination of the price of composite consumption is explained in the following Step 2. The taxes affect an individual’s decision-making through change in opportunity cost. Consumption taxes such as VAT and excise tax change the price of the composite consumption good (see Equation (9) and (14)), and the rise in the labor income tax reduces the opportunity cost of leisure. So the increase in the consumption tax tends to reduce consumption expenditures and increases (reduces) leisure (labor hours). And the rise in the labor income tax tends to reduce consumption and increase (decrease) leisure (labor hour).
Equation (5) shows the inter-temporal substitution of consumption. A rise in the opportunity cost of present consumption, which is the after-tax rate of return to capital (r(1- k)), raises the ratio of future consumption to that of the present. A rise
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 067 (fall) in the discount factor (rate) raises the ratio. The rise in the ratio implies the reduction of present consumption and higher savings. A rise in the capital income tax implies a decrease in the after-tax rate of return to capital, thus reducing savings. The ratio and savings are more responsive to the rate of return to capital and the discount factor when the inter-temporal elasticity of substitution (1/γ) is higher.
Given the wage profile (ea), the increase in the labor income tax over time ( al< a+1l) reduces (increases) the consumption ratio between the future and present when 1/ γ <1 (1/γ>1). The dependence of the response to the change in labor income tax profiles on the parameter is because two kinds of substitution are involved: intra-temporal and inter-temporal. Intra-temporal substitution involves a higher labor income tax that raises the ratio of leisure to consumption (Equation (4)). The consumption level is lowered given the level of leisure (labor hour). Inter-temporal substitution has increasing labor income tax making a worker reduce (increase) future labor hours (future leisure) and increase (reduce) present labor hours (leisure) to use the opportunity for a lower level of labor income tax at present. This substitution of labor (leisure) over time changes the consumption profile. Present (future) consumption increases (decreases) in response to the rise (fall) in labor income at present (future). The net effect depends on the relative magnitude of intra-temporal and inter-temporal substitution. When the former (latter) dominates the latter (former) (i.e. the intra-temporal substitution of elasticity (1 for the Cobb- Douglas utility function) is larger (smaller) than the inter-temporal substitution of elasticity (1/γ), consumption increases (decreases) overtime and savings will increase (decrease).
• Step 2: Decision on allocation among consumption goods
We assumed I kinds of consumption goods. The composite good mentioned in Step (i) is defined as the Cobb-Douglas function of I consumption goods (Equation (6)). The optimization problem at this step is as follows:
(7)
where is the price of consumption good , and is the consumption share of pi i αi good i.
The solutions to the optimization problem (7) are as follows:
(8)
068 • 2015/16 Knowledge Sharing Program with Algeria (9)
/ Equation (8) shows that the consumption share of goods i(pici (pc)) is the constant (αi), which is the characteristic of the allocation of consumption expenditures among goods when the composite good is defined as a Cobb-Douglas function of the goods.
At this stage, consumption taxes affect the price of the good i's(Equation (14)), and changes its consumption level given the consumption share. If consumption taxes are imposed differentially by consumption good, the allocation of consumption goods will be affected.
• Step 3: Decision on allocation between domestic and imported goods
At this stage, individuals make decisions on the consumption allocation between domestic and imported goods. We assume the good i is a combination of domestic and imported goods i. The combination is represented by the constant elasticity of substitution (CES) function (Equation (10)). The optimization problem at this stage is as follows:
(10)
(11)
D M D M D M where c i, c i, p i, p i, i, i are consumption of domestically produced good i and imported goods, and their prices and consumption tax rates imposed on their consumption. γi is the consumption share of domestically produced good i and Єiis the substitution elasticity between domestic and imported goods.
The solutions to the optimization problem are as follows:
(12)
(13)
(14)
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 069 M = – – where p i epi, pi is the price in the international market, and e is the exchange rate.
Equation (12)-(14) show that consumption taxes affect the after-tax price of goods, magnitude of consumption, allocation of consumption between domestic and imported goods, and eventually the aggregate values of consumption demand and imports.
Economic Effects of TaxesClassification Tax Type Taxes in Algeria Economic Effects & Characteristics
Professional - Taxed on labor income profit, agriculture - Affects labor supply & level of Labor income & unified Taxes on Labor consumption expenditures Income Tax flat tax under - Progressive taxes on labor income result income & payroll in differing effects across income classes tax Taxes on interest Interest from deposit & Income Tax - Taxed on interest income from savings & savings accounts dividend income from equity holdings - Affects savings & form thereof (bond vs. Dividend Taxes on equity) Income Tax dividends - Progressive taxes on capital income have Taxes on Capital Other Taxes Patrimony tax, differing effects across income classes on Capital registration fee Corporate - Taxed on corporate capital income Tax(or that Corporate profit - Affects corporate investment on firm's tax - Has differential effect if specifications capital) differ by industry group - General consumption tax Value-Added (taxed at same rate as every consumption VAT Tax good) - Affects consumption level Traffic fee, - Taxed differentially on each consumption warranty & good test tax, health - Affects consumption level & composition Excise Tax Taxes on tax on meat, of consumption goods Consumption professional - Has redistributive effect if propensity to activity tax (TAP) consume goods differs by income group - Taxed on imported goods Import duties & Import Tariffs - Affects import volume and composition customs if differentially taxed - Taxed on exported goods Export Tax Oil tax - Affects export volume and its composition if differentially taxed
Source: Author and Ministry of Finance, Algeria.
070 • 2015/16 Knowledge Sharing Program with Algeria 2.2. Companies (Production Sector)
We divided the production sector into J sectors. Firms in each sector produce commodities using value-added (VA) and intermediate inputs [Figure2-1]. We assumed that the magnitude of the VA and intermediate inputs to produce one unit of output is fixed. For simplicity, one VA unit is assumed to be needed to produce one unit of output (VAј = Qј).
[Figure 2-1] Production Structure
Intermediate goods consist of domestically produced and imported intermediate goods. We defined the following as a domestically produced intermediate input matrix (AD) and an imported intermediate input matrix (AM).
(15)
D M where a iј(a iј) is the unit of the domestically produced (imported) good i as an intermediate good needed to produce one unit of commodity ј.
The value-added part is modeled as a constant elasticity of substitution (CES) function of labor (L) and capital (K) (Equation (16)).
(16)
where ζј is the share of labor in producing VA, σј is the elasticity of substitution between labor and capital, and ψј is the parameter of the efficiency of labor and capital for production of VA.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 071 Once the firms decide the production level (Qј), the magnitude of the value-
added (VAј) needed is determined. The producers choose labor and capital to
minimize the cost of producing VAј. The optimization problem is as follows:
subject to equation (16)
where ώ and p refer to the costs of labor and capital. Minimization leads to demand for labor and capital (Equation (17), (18)). The demand for labor and capital depends on the relative cost, .
(17)
(18)
The labor cost is determined by the rate of market equilibrium wage (ω) and the subsidy rate (s): ώ = ω(1-s). The cost of capital is the cost required for an additional unit of investment and represented by Equation (19).
(19)
where i is the nominal interest rate, uј the statutory tax rate on corporate (firm)
capital, π the expected inflation rate, δј the economic depreciation rate, kј the
investment tax credit rate and zј the present value of depreciation allowance.
Without any taxes on capital, the cost of capital is the real interest rate plus
depreciation, pј = i-π+δј : the cost consists of the opportunity cost of raising funds for investment (real interest rate) and depreciation. The taxation on capital consists
mainly of four parts: (i) statutory tax rate (uј); (ii) tax deduction for investment
payment (iuј); (iii) investment tax credit (kј); and depreciation allowance (zј). The
return to capital is taxed at the rate uј. To guarantee the rate of return pј, the
return to capital needs to gross by 1/(1-uј). The tax deduction allowance for interest
payment reduces the tax burden by iuј. The investment tax credit reduces the tax
burden by kј multiplied by the investment amount, which reduces the purchasing cost of capital goods. The depreciation allowance also decreases the purchasing cost. The tax law specifies the schedule for the depreciation allowance of each type
of capital good (D1, D1…DT). Typically, the law usually mandates the number of
072 • 2015/16 Knowledge Sharing Program with Algeria years, T, for the depreciation allowance. Firms can choose between the declining balance depreciation method (Dt+1 = dDt, 0(20)
The effects of taxes on firms can be summarized as follows:
• Wage subsidies reduce the cost of labor use and increases employment. • The investment tax credit raises investment. • A rise in present value of the depreciation allowance raises investment. To raise the present value of depreciation, more depreciation needs to be allowed in the early stage of capital use. This method is called accelerated depreciation allowance. • A rise in the statutory tax rate tends to boost the cost of capital and reduce
investment and has three effects: raising the cost of capital by growth, (1-uј); lowering the cost by increasing tax reduction through deductions for interest
payment iuј; and lowering the tax burden through the depreciation allowance,
uјzј. In general, the first effect dominates the other two. • Differential taxation, which treats capital or labor differently across production sectors, induces the allocation of production factors across sectors.
2.3. Government
The government raises tax revenue and purchased goods and services from the private sector to provide them to the public. As mentioned earlier, the tax revenue consists of revenue from taxes on labor and capital income, corporations, consumption, other imported goods and PAT.
Revenue form labor income tax =
Revenue form capital income tax =
Revenue form consumption tax =
Revenue form taxes on other inported goods =
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 073 Revenue from taxes on firms (corporation tax) =
Revenue from PAT =
D M where aai, c aiј, c aiј, ail, and ail are asset holdings, consumption of domestically produced and imported goods ј, and labor and capital income tax rates for the aged who belong to the income group i, r is the real rate of return, and Debt is the D magnitude of debt. G, I, X, are government spending, investment and exports. B jp M and B jpare the proportion of (domestic and imported) goods j needed for one unit D M of investment in sector p. g j and g j are the proportions of (domestic and imported) goods ј for one unit of government spending. Pis the TAP rate.
The first three taxes are imposed on labor and capital income and household consumption. Taxes on other imported goods are those on imported goods for investment, government spending and intermediate inputs. Corporate (or business) tax is imposed on the firms. The tax base for the corporate tax is income from capital, which is the revenue (pQ) minus wage cost (ωL) minus intermediate inputs
( ).
The tax burden is reduced by the investment tax credit, which reduces the tax burden with the proportion of the investment tax credit rate (k), and deduction for the depreciation allowance (D) and interest payment (rDebt). TAP is imposed on demand for consumption and investment, government spending and intermediate input for domestically produced goods and exports.
For the simplicity of the analysis, the overall level of government expenditures was assumed to be balanced with tax revenue, namely a balanced state budget.
2.4. Foreigners
Exports are determined by overseas demand for domestically produced goods. The following foreigner’s demand function is assumed:
(21)
074 • 2015/16 Knowledge Sharing Program with Algeria where e is the exchange rate, exj the export tax rate, pj domestic price and exj the elasticity of exports with respect to export price.
The export tax, exj, affects export volume, and its composition if it is differentially taxed by export good.
2.5. Competitive Equilibrium
The competitive equilibrium for a given tax policy is defined as the prices of commodities and factors and resource allocation satisfying the following conditions:
(1) Goods market equilibrium conditions hold
(E1) consumption demand + investment demand + government purchase demand + export demand + demand for intermediate goods
= final goods demand (FDj)+demand for intermediate goods
= production of commodities (Qj)
The equilibrium condition (E1) determines the price of domestically produced goods, Pj.
Consumption demand = (22)
where µai: the population aged of income group i D c aij: consumption demand for domestically produced goods j, by the aged belonging to income group i
Investment demand = (23)
where Ip=Kp- (1-δp)k-1p: capital stock at the end of the previous period for sector p. D B jp: unit of (domestically produced) commodity j to make one unit of investment of sector p (assumed constant)
Government purchase demand = D g jG (24)
Export demand: see Equation (21).
Intermediate goods demand =
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 075 Overall production of commodities j is determined by the equilibrium condition
E1:
(25)
(2) Factor market equilibrium conditions hold.
(E2) Factor demand = factor supply
Equilibrium condition E2 determines factor prices, ω and r.
For labor market:
For capital market:
where is the asset holdings of the aged belonging to income group . aai a i
(3) Exchange market equilibrium conditions hold
(E3) Demand for imported consumption goods + Demand for imported investment goods + Demand for imported government purchase + Demand for imported intermediate input = Export
The equilibrium E3 determines the exchange rate e.
Demand for imported consumption goods =
Demand for imported investment goods =
Demand for imported government purchases =
Demand for imported intermediate goods =
(4) Government budget is balanced.
(E4) Tax revenue = government expenditures
076 • 2015/16 Knowledge Sharing Program with Algeria 3. Model Calibration 3.1. Income Groups & Labor Productivity
The household sector consists of five income groups. The classification of each group should be based on lifetime income if the wage profile of each income group can be estimated. We, however, took an alternative approach because the data for the estimation was not provided. We used the salary survey of workers by group from the Algerian government see
. We incorporated 10 income groups into five groups and computed the relative levels of salary using the average by income group.For labor productivity by age and income group (eai), we estimated the age profile of wages using wage information by age. The age profile was assumed to be the same across income groups [Figure 2-2].2) The only difference was the absolute wage level. This was inevitable because the data needed for the estimation for Algeria was insufficient.
Average Net Salaries in 2011 (Nat'l Public & Private Sectors)(Unit: DA) Income 5 Income Minimum Maximum Average Average Relative Level Group Groups
1 - 14,308 10,608 [1] 12,968 1.000 2 14,308 16,500 15,328
3 16,500 18,833 17,771 [2] 18,846 1.453 4 18,833 21,000 19,920
5 21,000 24,468 22,641 [3] 24,639 1.900 6 24,468 29,098 26,636
7 29,098 32,962 30,755 [4] 33,242 2.563 8 32,962 39,000 35,729
9 39,000 49,799 43,355 [5] 57,690 4.449 10 49,799 - 72,024
Source: Ministry of Finance, Algeria.
2) The wage rate of the old age group might be overestimated. The information provided by the Algerian government reported the wage levels for ages 50 and older together and did not separate the groups into subgroups. Overestimation could cause a delay in retirement.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 077 [Figure 2-2] Wage Rate Assumption
7 6 Group 1 5 Group 2 4 Group 3 3 Group 4 2 Group 5 1
0 21 31 41 51 61 71 Age
3.2. Preference Parameters
The discount rate (β) was assumed to be 0.96. The coefficient of the relative risk aversion, γ , was assumed to be 4, a standard value for this parameter in overlapping generation models in which the length of a period was one year. The share of leisure in the Cobb-Douglas utility function was 0.67, a standard value for the leisure share in computable general equilibrium models.3)
For classification of the production sector (also consumption sector), we followed the classification of the input-output (I-O) table. The industry was classified into 22 sectors (Table 3), and we confined our analysis to sectors 1-19 because 20-22 were not considered production sectors in the I-O table.
The final demand consists of consumption, investment, government purchases and net exports. We defined consumption as that of households, the financial sector (Sector 20) and real estate (Sector 21). The I-O table of Algeria reported the final consumption of households (CF Household), the financial sector (CF IF) and real estate (CF AI). We incorporated these three sectors into the non-government consumption sector (Non-Gov’t).
We computed the consumption share by consumption goods (αj) using the 2014 I-O table of Algeria (Table 4). Among the 19 consumption goods, the products of agriculture, forestry and fisheries (Sector 1), transportation and communication (Sector 15), and trade (Sector 16) take a large share of consumption.
3) See Cooley (1995).
078 • 2015/16 Knowledge Sharing Program with Algeria The proportion of investment goods by sector was computed using the I-O table
. The proportion of investment goods is much different from that of consumption. The products of chemicals, plastics and rubber (Sector 6), building, civil work and hydraulics (Sector 8) have a large proportion of investment goods. In government consumption, the products of Sectors 1 and 15 have a large proportion. The majority of Algeria’s exports consist of crude oil, a product of Sector 3 (hydrocarbons). According to data provided by the Algerian government, the share of hydrocarbon exports is 95.4percent in 2014. The proportion of oil exports is much lower in the I-O table (87.8 percent). We used the proportion in the I-O table. Table 4 also reports the share of imports and computed the I-O table. The share of imports here is the ratio of imported goods and services to overall demand, including intermediate input demand as well as final demand. For a more reliable analysis, we need estimates for the shares of imported goods for consumption, investment, government consumption and intermediate inputs separately. The I-O table of Algeria, however, did not report the imports for each component. So we applied the ratio of imports to overall demand to all items (consumption, investment, government consumption and intermediate inputs).For the elasticity of substitution between domestic and imported goods for consumption (Єi), we had no reliable estimates for Algeria, so we assumed a moderate value of 2 for all consumption items.
For the export magnitude coefficient , which directly affects export level, (Coffi) we chose the value that reproduced the real export magnitude of crude oil as a percentage of GDP. For price elasticity of export demand, we lacked reliable estimates and assumed a moderate value of 0.5 for all export items.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 079
Classification of IndustrySector1) Industry
1 Agriculture, forestry & fisheries
2 Water & energy
3 Hydrocarbons
4 Petroleum services & public works
5 Mining & quarrying
6 Ironwork, metallurgy, electro-mechanical & electrical industries (ISMMEE)
7 Construction materials
8 Buildings, civil work & hydraulics (BTPH)
9 Chemicals, plastics & rubber
10 Agrofood industries
11 Textiles, clothing & hosiery
12 Leather & footwear
13 Wood, paper & cork
14 Various industries
15 Transportation & communications
16 Trade
17 Hotels, coffee shops & restaurants
18 Business services
19 Household services
20 Financial services (banks & insurance companies)
21 Real estate
22 Non-profit services for local community
Note: 1) Classification in input-output table. Source: Ministry of Finance, Algeria.
080 • 2015/16 Knowledge Sharing Program with Algeria
Parameters for Final Demand ComponentsShare of Consumption Gov’t Imported Investment Export Sector1) Proportion Consumption Goods Proportion Proportion (α₁) Proportion (1-γ₁)
1 0.248 0.143 0.008 0.402 0.001
2 0.016 - - 0.001 -
3 0.013 0.038 - 0.003 0.878
4 - - 0.067 - -
5 - 0.205 - 0.002 0.001
6 0.034 0.645 0.259 0.002 -
7 - 0.133 - 0.017 -
8 0.011 0.001 0.526 0.002 -
9 0.023 0.540 0.001 0.011 0.024
10 0.111 0.235 - 0.012 0.003
11 0.026 0.422 - 0.028 -
12 0.008 0.468 - 0.003 -
13 0.011 0.541 0.006 0.007 -
14 0.007 0.293 - 0.002 -
15 0.317 0.046 - 0.337 0.021
16 0.107 - 0.090 0.000 0.042
17 0.034 0.087 - 0.001 0.001
18 0.006 0.661 0.043 0.170 0.027
19 0.028 - - 0.001 -
Note: 1) Classification in input-output table. Source: Ministry of Finance, Algeria and Author’s calculation.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 081 3.3. Technology Parameters
We classified the production sector into 19 sectors. The parameters related with production consist of the intermediate input matrices (AD, AM), the labor income
share of the value-added sector (ζј), the elasticity of substitution between labor and
capital input (σј), and the efficiency coefficient of the value-added sector (ψј).
We took the following steps to compute AD, AM. First, we computed the combined intermediate matrix A. We computed each element of the intermediate input matrix by dividing the intermediate inputs by overall production. Second, we separated the combined intermediate matrix A into AD and AM. Usually, the intermediate inputs of domestically produced and imported goods are estimated and reported separately. In the case of Algeria, however, only combined intermediate inputs were reported in the I-O table. We separated A into AD and AM, using the share of imported goods. In that process, we assumed the import share of intermediate goods as the same across production sectors (e.g. the share of imported intermediate goods 1 for the production of sector 19 is the same as that for the production of sectors 1-18). The matrices computed (AD, AM) were reported in Appendix 2.
The labor income share was computed using the I-O table ([Figure 2-3].) The labor income share was low compared with Korea’s. The overall level of labor income share was around 60 percent. For Algeria, the proportion of labor income was lower than 60 percent for most sectors except for Sector 4 (petroleum services and public works). In the case of Sector 4, the labor income share was slightly higher than 1 because the gross operating surplus, or capital income, was negative in 2014. This is unusual and computation of equilibrium when the labor income share is larger than 1 is impossible. So the labor income share for Sector 4 was assumed to be 90 percent.
The elasticity of substitution between labor and capital input (σј) was assumed to 1.2. We had no reliable estimates for the elasticity of substitution for Algeria, so we used the value used by Cho and Song (2009). The efficiency coefficient of the value-
added sector (ψј) was assumed to 1 based on the assumption that VAj = Qj . The economic depreciation was assumed to be 5percent per annum, a standard value widely used.
082 • 2015/16 Knowledge Sharing Program with Algeria [Figure 2-3] Share of Labor Income
(Unit: %) 1.2
1
0.8
0.6
0.4
0.2
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Sector Source: Ministry of Finance, Algeria and Author’s calculation.
3.4. Taxes & Government Expenditures
Taxes in Algeria consist of those on income, work (labor), consumption, corporations, professional activity and oil. Each category has many items of taxes (see Appendix 3). Non-capital income tax or that of labor includes taxes on professional profit, agricultural income, unified flat rate under income tax and salary. All labor income taxes except for the unified flat tax are progressive. Reflecting this, we considered the labor income tax as progressive. In addition, we assumed that the income tax rate for marginal labor as a linear function of tax bases: marginal labor income tax rate = a + b labor income. The progressive part was computed using the structure of the marginal tax rate shown in [Figure 2-4]. The b is the slope of the trend line of the structure of the marginal income tax rate. The proportional part a was chosen to produce the proportion of the labor income tax revenue close to the actual value.
Capital income consists of rental income tax, which belongs to income tax, taxes on dividends, interest income (from deposit and savings accounts), patrimony and registration fees, which belong to capital tax. All taxes in the capital income tax category are deemed proportional except for patrimony tax. Moreover, the tax rates differ depending on tax base. Therefore, the capital income tax was assumed to be a single proportional tax. The tax rate was determined to reproduce the tax revenue proportion of the capital income tax.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 083 [Figure 2-4] Income Tax Rate for Marginal Labor
(Unit: %) 0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 0.000 1.285 2.570 3.856 5.141 6.426 7.711 8.997 Incom (1=12,968 DA) Source: Ministry of Finance, Algeria and Author’s calculation.
The consumption tax consists of VAT, tariffs and customs duties, and taxes on domestic consumption and oil products. We reflected VAT, tariffs and customs duties because the revenue generated from taxes on domestic consumption and oil products was minimal.4) Different VAT rates were applied to different commodities, so effective tax rates were inevitably different by consumption item. We computed the effective tax rates by dividing the VAT revenue across sectors by the sum of non- government consumption and imports, which constituted the tax base for VAT (See
).5) The computed tax rates were reasonable except for those of Sector 2, 5 and 10. The tax rates for those sectors were higher than the highest statutory tax rate of 17 percent. The reasons for this exceptionally high level could include mismatches between VAT revenue and its tax bases across sectors. Another reason could be that VAT exemptions could have been applied to intermediate inputs. In that case, the effective tax rate for VAT could be higher than the statutory tax rate. When VAT exemptions are allowed, the VAT on sales is exempt but the refund of VAT on purchases is not applied. The refund of VAT on purchase removes the tax burden, which has accumulated in previous stages of the transaction. So when a VAT exemption is applied to intermediate input transactions, the VAT burden can be accumulated until the transaction of the final goods. 4) The oil product tax may be reflected in the simulation. The tax is imposed on imported oil products. The effective tax rate for Sector 3 (Hydrocarbons) reported in Table 6 is a high 35.5 percent, suggesting the I-O table reflects the burden of oil product tax. 5) VAT revenue from non-government consumption and imports of goods and services across sectors are reported in the I-O yable.
084 • 2015/16 Knowledge Sharing Program with Algeria We computed the effective rates of tariffs and customs duties by dividing the tariff and customs revenue by the import of goods and services across sectors. The effective tax rates were quite high for Sector 3, 11 and 12.
The taxes applied to firms are the Professional Activity Tax (TAP) and corporate tax. TAP is imposed on activities related to trade, industry (manufacturing, building and service delivery). The tax base is overall sales (or gross revenue – taxes). Though TAP is the responsibility of firms, this is basically a sales tax. The difference between TAP and VAT is that the former is imposed on intermediate goods as well as final consumption goods. In addition, TAP is not imposed on imports unlike VAT. The statutory tax rates are 1 percent for production activities, 2 percent for other activities and 3 percent for pipeline transportation activities. Considering the allowances for TAP, the tax rates became 0.5 percent, 1.0 percent , 1.5 percent and 3.0 percent, respectively6) We computed the effective TAP rates using the final non- government consumption on products from the hydrocarbons sector (See Sector 3),7) and the intermediate input of the pipeline transportation for Sector 3 and overall production (or sales) across production sectors, statutory tax rates and tax revenue from PAT in 2014.
Corporate taxation consists of tax rates, investment tax credit and depreciation allowances. Algeria does not allow investment tax credits. The corporate tax rates are 19percent for goods production; 23 percent for works and public buildings, tourism and thermal activities except for travel agencies; and 26 percent for other activities. We allocated the tax rates among production sectors based on the criterion. We assumed the same length of depreciation allowance because of the lack of the data on asset composition across production sectors. We assumed 15 years for the depreciation allowance period based on tax depreciation rules See (See Appendix 4). The annual depreciation applied was 10-25 percent per annum for equipment and 1-5 percent for structure. When the linear depreciation rate rule was applied, the length of the depreciation allowance was four to 10 years for equipment and 20-100 years for structure.
When computing the cost of capital, the proportion of funding sources for investment needs to be specified (Equation (19)). We assumed that the firms did not raise such funds through bank loans because most major producers in Algeria are in the public sector and thus depend on government finances for investment. This
6) The allowances for PAT are: (i) 25 percent of allowance is permitted for activities on which a tax rate of 2 percent is imposed; (ii) 75 percent for retail sale of fuel, natural gas and oil; (iii) 50 percent for retail sale of medicine; and (iv) 30 percent of overall sales operations. 7) Pipeline transportation activities in oil production was not reported separately in I-O table. We considered the intermediate input of Sector 15 (transportation and communication) for the production of Sector 3 (hydrocarbons) as the sales from the pipeline activities. So the sales can be over-evaluated.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 085 specification could result in the over-evaluation of cost of capital and corporate tax revenue. This does not seem serious, however, because corporate tax revenue is a little underevaluated in the benchmark economy of the policy situation (See
). We assumed the expected inflation rate as zero to focus on the real economy. So we used the real interest rate for i in Equation (19). Tax Parameters(Unit: %)
Tariff & Effective PAT Statutory PAT Corporate Tax Sector1) VAT Customs Rate Rate Rate Duties2)
1 4.3 6.2 0.0 0.0 19
2 40.2 0.0 0.0 0.0 19
3 2.7 35.5 0.7 0.5, 1.0 19
4 0.0 0.0 1.1 1.5 26
5 65.7 7.5 0.0 0.0 19
6 6.0 4.7 0.7 1.0, 0.5 19
7 0.4 8.3 0.7 1.0, 0.5 23
8 0.0 11.6 1.1 1.5 23
9 14.3 5.3 0.7 1.0, 0.5 19
10 18.2 7.6 0.7 1.0, 0.5 19
11 7.3 25.9 0.7 1.0, 0.5 19
12 6.0 40.4 0.7 1.0, 0.5 19
13 14.1 6.6 0.7 1.0, 0.5 19
14 14.0 17.5 1.1 1.5 19
15 3.1 0.0 1.1 3.0, 1.5 26
16 0.0 0.0 0.0 0.0 26
17 16.2 0.0 1.1 1.5 26
18 4.0 0.0 1.1 1.5 26
19 11.5 0.0 1.1 1.5 26
Note: 1) Classification in input-output table. 2) Import taxes and duties. Source: Ministry of Finance, Algeria and Author’s calculation.
086 • 2015/16 Knowledge Sharing Program with Algeria The rule for the oil tax is complicated (See Appendix 3) and we had insufficient information to estimate the tax rate for oil production. We took an alternative approach to estimate the effective tax rate, using the production of Sector 3 and oil tax revenue. Most oil tax revenue is raised from crude oil exports, so we considered oil tax as an export tax. The proportional tax rate for the oil tax computed was 55 percent. As mentioned in Section 2, we assumed that the government budget was balanced. A complication arising from this assumption is the Revenue Regulation Fund (RRF), which was established in 2000 to keep a fund to support economic recovery programs. The RRF hosts oil (hydrocarbon) revenues when the price of oil exceeds U.S.$37 a barrel, and is expected to take over the national deficit.
From 2000 until 2009, the proportion of the fund to GDP grew to 45 percent, but this has decreased since 2010. The trend reflects the demand for funds from RRF to partially finance the fiscal deficit and prepare for a drop in government revenue due to declining oil prices. We assumed that over the long run, the magnitude of the RRF will stay stable. This implies the RRF’s inflow and outflow as balanced. Accepting this assumption, we assumed that oil tax revenues were used to finance government expenditures.
[Figure 2-5] Main Indicators of RRF
120 50.0
100 45.0 40.0 80 35.0 60 30.0
40 25.0
USD per Barre 20.0 % of GDP 20 15.0 0 10.0 -20 5.0
-40 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Oil price Fiscal balance/GDP RRF fund/GDP
Source: Ministry of Finance, Algeria and Author’s calculation.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 087 4. Policy Simulations 4.1. Benchmark Economy
Our benchmark economy is that of Algeria in recent years. Table 6 compares the macroeconomic variables computed in the model and the actual values as of 2014, and for the 2010-14 period. The ratio of capital (or wealth) to GDP computed was 3.09. We could not evaluate the fitness of this value to the actual value because of lack of information on capital stock in Algeria. But the computed value was lower than in developed economies, where the value is usually between 3 and 3.5. The low level of capital accumulation is not a serious problem because Algeria is still a developing country.
Government expenditures were under-evaluated, while the tax revenue computed was close to the value for 2014. This was due to the assumption that the state budget is balanced. The fiscal deficit was unusually large in 2014 (also for 2010-14) because of the fall in oil prices. The assumption of the balanced budget was inevitable because our model simulated only a steady economy of the public sector.
For the proportion of tax revenue, the shares of taxes on labor income capital income and oil and PAT were close to the actual values. The computed revenue proportion of the consumption tax on domestic and imported goods did not properly reflect the state of the Algerian revenue structure. This is because of insufficient information to replicate the share of demand for domestic and imported goods. Corporate tax revenue was a little underestimated because calibration of the model n did not properly reflect the exemption and reductions for these taxes.
088 • 2015/16 Knowledge Sharing Program with Algeria
Summary IndicatorsComputed Actual (2014) Actual (2010-14)
Capital / GDP 3.09 - -
Gov’t Expenditures / GDP (%) 22.0 39.4 39.4
Nat’l Savings Rate (%) 22.8 - -
Export / GDP (%) 31.8 27.8 33.3
Tax Revenue / GDP (%) 22.0 22.0 23.8
Labor Income Tax 12.5 14.5 13.2
Capital Income Tax 2.4 2.4 2.3
Consumption Tax 12.0 9.2 8.8 (Domestic Goods) Proportion of Consumption Tax Tax Revenue (%) 16.6 22.4 20.1 (Imported Goods)
Corporate Tax 5.6 6.8 7.2
PAT 5.1 5.0 4.6
Oil Revenue 45.8 39.7 43.8
Source: Ministry of Finance, Algeria and Author’s calculation.
[Figure 2-6]-[Figure 2-8] compares the computed proportions of final demand and production with their actual values as reported in the I-O table for 2014. In the case of final demand, the computed proportion was close to the actual value except for several sectors. The computed proportions of Sector 3 (hydrocarbons), Sector 6 (ironwork, metallurgy, electronic and electrical industries) and Sector 10 (agrofood industries) were underevaluated, while those for Sector 1 (agriculture, forestry and fisheries), and Sector 15 (transportation and communications) were overevaluated. Similar tendencies were observed in the case of final demand for domestic products. In the case of production, the mismatch between the computed and actual values grew more serious. The discrepancy between the actual production share and computed value was observed even in the sectors, whose final demand shares were reproduced, such as Sector 2 (water and energy), Sector 11 (textiles, clothing and hosiery), Sector 12 (leather and footwear) and Sector 13 (wood, paper and cork). Several reasons explain the discrepancies between the computed and actual values. First, calibration of the model might not properly reflect differential taxation across sectors. The tax expenditures for consumption and corporate taxes could have been improperly incorporated. Second, the I-O table, which we used in the calibration, had insufficient information. It did not separately report the
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 089 proportion of imported goods in intermediate inputs, consumption, investment and government consumption and merely reported the combined proportion of imported goods.
[Figure 2-6] Proportion of Final Demand
0.3 0.25 0.2 0.15 0.1 0.05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 -0.05 Sector
Computed Actual
Source: Ministry of Finance, Algeria and Author’s calculation.
[Figure 2-7] Proportion of Final Demand for Domestic Products
0.3 0.25 0.2 0.15 0.1 0.05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 -0.05 Sector
Computed Actual
Source: Ministry of Finance, Algeria and Author’s calculation.
090 • 2015/16 Knowledge Sharing Program with Algeria [Figure 2-8] Proportion of Overall Production
0.3 0.25 0.2 0.15 0.1 0.05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Sector
Computed Actual
Source: Ministry of Finance, Algeria and Author’s calculation.
[Figure 2-9] shows distributional aspects of Algeria, and indicates that labor income is more unequally distributed than wealth. The difference in the distribution of labor income and wealth (or capital income) is due to the progressiveness of the labor income tax. [Figure 2-10] shows the computed effective income tax rates of marginal labor across income groups. The tax rate increases progressively as income level rises. The labor income tax burden for younger high-income groups is much larger than that for younger low-income groups, which means that the age profile of the after-tax labor income of high-income groups is flatter than that of low- income groups. The age profile of consumption is similar among income groups, however, so the reduction magnitude of the savings of high-income groups due to the progressive tax on labor income is larger than that of low-income groups.8)
We were unable to compare the computed distribution of wealth among income groups because information on actual distribution was not provided. In addition, we did not reflect the difference in the savings behavior between income groups. Our model was a simple lifecycle that did not reflect the bequest motive. In addition, very high income groups, who own an extremely large proportion of wealth, were not included.
8) See Appendix 5 for a comparison of the differences between before- and after-tax labori income and the consumption pattern of income groups.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 091 [Figure 2-9] Distribution of Income & Consumption
4.5
4 3.5 3
2.5 2 1.5
1
0.5
0 Group1 Group2 Group3 Group4 Group5
Income group
Wealth Labor income Labor hour Consumption
[Figure 2-10] Marginal Labor Income Tax Rate by Age & Income Group
0.25
0.2
Group1 0.15 Group2
Group3 0.1 Group4
Group5 0.05
0 21 31 41 51 61 71 Age
092 • 2015/16 Knowledge Sharing Program with Algeria 4.2. Policy Experiments
We tried policy experiments with the simulation model, reflecting requests from the Algerian government. The policy simulation plan is summarized in
. The policies consisted of revisions of value-added, corporate and income tax and PAT. The revisions of VAT were mainly composed of adjustments of tax exemptions and cuts. The simulation of corporate tax revision was related to changes in the tax rate. The simulation of income tax revision was considered an adjustment of progressivity. Finally, we simulated a tax rate change for PAT. Policy Simulation PlanI. Value-Added tax
S1-1. Taxation at reduced rate of 7% exempt for certain operations: agriculture, medicine, upstream oil (sale of hydrocarbons) for domestic market S1-2. Increase of one percentage point of current rates (from July to August & from 17% to 18%) S1-3. Down one percentage point of current rates (July-June & 17% to 16%); S1-4. Setting of new rate of 3% to be applied to exempt goods and services.
II. Tax Profit Corp. “IBS”
S2-1. Reduced rate applicable to industrial sector from 19% to 15% S2-2. Increased rate from 26% to 30% for financial sector (banks & insurance) & telecommunications
III. Global Tax “IRG” Income
S3-1. Aligning tax threshold of labor income, no tax rate applied from 15,000 dinars to 18,000 dinars per month S3-2. Changing marginal rate of annual progressive scale (0, 10, 20 and 30% instead of 0, 20, 30 & 35%)
IV. Professional Activity Tax (TAP)
S4-1. Lifting of TAP S4-2. Reduction of rate applicable to production from 1% to 0.5%
Source: Ministry of Finance, Algeria.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 093
Policy Simulation ResultsS1-1 S1-2 S1-3 S1-4 S2-1 S2-2 S3-1 S3-2 S4-1 S4-2
GDP1) 0.05 0.10 0.09 -0.07 0.05 -0.02 0.27 1.91 -0.34 -0.05
Capital1) -0.62 -0.20 0.17 -0.15 0.24 -0.06 0.35 2.46 0.11 0.01
Consumption1) -4.33 -1.58 1.46 -0.82 0.20 -0.07 0.51 36.0 0.92 0.09
Domestic 1) -4.12 -1.47 1.45 -0.79 0.21 -0.08 0.51 3.66 1.03 0.13 Consumption
Investment1) -0.94 -0.32 0.39 -0.23 0.36 -0.07 0.37 2.60 0.88 0.16
Gov’t Expenditures 11.9 4.64 -3.67 1.95 -0.63 -0.16 -0.41 -3.05 -5.02 -0.37 (Tax revenue)1)
Nat’l Savings Rate 22.8 22.8 22.8 22.7 23.6 22.8 22.8 22.8 23.3 22.8 (%)
Exports (Imports)1) 0.49 0.23 -0.12 0.02 0.01 0.00 0.22 1.51 -0.56 0.00
Exchange Rate1) 1.95 0.90 -0.49 0.14 -0.17 0.02 -0.01 -3.05 -0.52 0.04
Revenue Proportion
Labor inc. Tax 11.2 12.0 13.0 12.3 12.6 12.6 12.0 8.2 13.2 12.6
Capital inc. Tax 2.1 2.3 2.5 2.4 2.4 2.4 2.4 2.5 2.5 2.4
Consumption Tax 17.8 14.1 9.6 13.2 12.1 12.1 12.1 12.8 12.7 12.0 (Domestic)
Consumption Tax 18.1 17.5 16.4 16.7 16.7 16.7 16.7 17.4 17.3 16.9 (Imported)
Corporate Tax 4.9 5.3 5.8 5.4 5.0 5.0 5.6 5.8 5.9 5.6
PAT 4.6 4.9 5.3 5.0 5.1 5.1 5.1 5.3 0.0 4.7
Oil Revenue 41.3 43.9 47.4 45.0 46.1 46.1 46.1 48.0 48.4 45.8
Note: 1) growth rate (%).
The VAT revision changes the effective VAT rates as in Figure 11. Plans S1-1, S1-2 and S1-3 raise the effective VAT rates and Plan S1-3 lowers them. These plans have differential effects on VAT rates across production sectors. The effects of the VAT revision are summarized in Table 8. Increase of the effective tax rate by reducing the number of exemptions or raising the statutory VAT rate and raising the growth in government expenditures financed by VAT tax revenue boosted GDP, but the magnitude of GDP growth was negligible (S1-1, S1-2). And in the case of S1-3 (S1- 4), the growth rate was positive (negative) though the volume of government purchases increased (decreased). The absolute value for the GDP growth rate was small, however, primarily due to the rise (or fall) in consumption. The rise in the VAT
094 • 2015/16 Knowledge Sharing Program with Algeria rate raised the after-tax price of goods [Figure 2-12]. In addition, the investment was partially crowded out due to the fall in private savings, which raises the cost of capital.9)
[Figure 2-11] Effective VAT Rate Change
8 (Unit: %P)
6
S1-1 4 S1-2
2 S1-3 S1-4 0
-2
-4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
[Figure 2-12] Change in Domestically Produced Goods (S1-1) (Unit: %) 9
8
7
6
5 4
3
2
1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Sector
9) The revision plan S1-1 raised the cost of capital by about 0.15%.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 095 The changes in the cost of capital due to corporate tax revisions (S2-1, S2-2) are shown in [Figure 2-13]. The revision plan S2-1 (S2-2), which lowers (raises) the cost of capital, increases (reduces) the investment. The change in investment was not large, however, because the reduction (expansion) of government purchases decreased (increased) the aggregate demand. In addition, the revision plan S2-1 deteriorated differential taxation by cutting corporate tax rates for production sectors with relatively lower rates of corporation tax (19 percent rather than 23 or 26 percent) under the existing policy.
[Figure 2-14] shows the differential effects of the corporate tax revision across production sectors. The prices of domestically produced goods of the sectors in which the cost of capital fell (rose) in the case of S2-1 (S2-2), were lowered (raised). For example, the goods prices of Sector 1-3, 5, 6, 9-14 were lowered in S2-1. The magnitude of the price reduction was affected by the capital income share, as well. The prices of the sectors (1, 10, 14), the capital income share of which is higher [Figure 2-3], were far more affected by changes in the cost of capital.
The overall level of final demand for most production sectors rose in response to the fall in goods prices, except for Sector 6 and 8, which had a large proportion of government purchases (S2-1). Demand for goods from these sectors was reduced due to the fall in government expenditures. The change in capital demand was larger than that of production because of the substitution of capital input for labor input in response to the change in the cost of capital.
[Figure 2-13] Cost of Capital
(Unit: %P) 0.15
0.1
0.05 S2-1
0 S2-2
-0.05
-0.1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Sector
096 • 2015/16 Knowledge Sharing Program with Algeria [Figure 2-14] Effect of Corporate Tax
(Unit: %) Change in Capital Demand Change in Production
0.8 0.8
0.6 0.6 0.4 0.4 0.2 0.2 0 -0.2 0 -0.4 -0.2 -0.6 -0.4
-0.8 -0.6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 -0.8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Sector Sector
Change in Final Demand Change in Domestic Good Price
0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0 0 -0.2 -0.2 -0.4 -0.4 -0.6 -0.6 -0.8 -0.8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Sector Sector S2-1 S2-2
The plans to revise labor income tax (S3-1, S3-2) lowered progressivity [Figure 2-15]. These revisions improved the efficiency of the economy. Though the tax revenue (and government spending) was reduced, consumption and investment increased. The problem with this revision plan was the deterioration of distribution. [Figure 2-16] shows the distributional effects of the revision plan S3-2,10) which raised after-tax labor income but the benefit was larger for higher-income groups. Moreover, the asset holdings of low-income groups were reduced due to the change in the age profiles of labor income and consumption. The overall level of labor income for most age groups rose due to the reduction of progressivity. In particular, the after-tax labor income of young age groups increased because of a fall in the average tax rate for labor income and the inter-temporal reallocation of labor supply. Households reallocated the labor supply when old to that when young, because the labor tax rate was lowered far more for labor income when young than that when old. Consumption at a young age increased more than labor
10) The distributional effects of the revision plan S3-1 were minimal.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 097 income because of the overall growth in labor income. So the savings of young age groups were reduced. The magnitude of the reduction of asset holdings of young age groups was larger for low-income groups because the magnitude of the labor supply adjustment from old to young age was smaller.
[Figure 2-15] Tax Rate Structure of Labor Income
(Unit: %) 0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0 0.000 1.285 2.570 3.856 5.141 6.426 7.711 8.997
income (1=12,968DA)
Bench mark S3-1 S3-2
098 • 2015/16 Knowledge Sharing Program with Algeria [Figure 2-16] Distributional Effects (S3-1, S3-2) After-Tax Labor Income Wealth
2.5 7 6 2 5 1.5 4 S3-1 S3-1 3
Unit: % 1 Unit: % S3-2 2 S3-2 0.5 1 0 0 group1 group2 group3 group4 group5 -1 -2 group1 group2 group3 group4 group5 Image group Image group
Average Labor Income Tax Rate Change(S3-2) Change in After-Tax Labor Income(S3-2)
0.00 25 -0.50 20 Group1 Group1 -1.00 15 Group2 Group2 -1.50 10 Group3 5 Group3 -2.00
Unit: % Group4 Unit: % 0 Group4 -2.50 Group5 -5 Group5 -3.00 -10 -3.50 -15 -4.00 -20 age 21 31 41 51 61 71 age
Change in Consumption(S3-2) Change in Wealth 8 10 8 7 6 Group1 Group1 6 4 Group2 2 Group2 5 Group3 0 Group3 4 -2
Unit: % Group4 Unit: % Group4 3 -4 Group5 -6 Group5 2 -8 1 -10 22 32 42 52 62 72 0 21 31 41 51 61 71 age age
The TAP revision plans (S4-1, S4-2) reduced the effective TAP rate (see [Figure 2-17]). The effects of this reduction on GDP was minimal though government expenditures were reduced due to the decrease in TAP revenue because of higher consumption. The TAP rate reduction lowered the price of consumption goods. As mentioned in Section 3, TAP was applied to intermediate inputs as well as to final demand. So the prices of domestically produced goods and services were raised cumulatively in the process of production. Implementation of Revision Plan S4-1,
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 099 which removed TAP, lowered the price of domestically produced goods by up to 2 percent (see [Figure 2-18]). The magnitude of price change was large compared to the change in the effective TAP rate of 0.7~1.1 percent. In addition, TAP was imposed only on domestically produced goods and services. These aspects of the tax resulted in distortion of resource allocation. Removing TAP will improve the efficiency of resource allocation.
[Figure 2-17] PAT Rate Change
0 (Unit: %P)
-0.2
-0.4
-0.6 S4-1
S4-2 -0.8
-1
-1.2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
[Figure 2-18] Change in Prices of Domestic Goods (S4-1)
(Unit: %) 0
-0.5
-1
-1.5
-2
-2.5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Sector
In addition to the policy experiments, we simulated a more fundamental tax reform comprising: [1] replacement of the labor income tax with a flat-rate VAT; [2]
100 • 2015/16 Knowledge Sharing Program with Algeria removing the capital income tax and imposing a flat-rate VAT; and [4] removing the corporate tax and imposing a flat-rate VAT. We adjusted the VAT rate to minimize the change in tax revenue due to the tax reform to investigate the pure tax effects.
The tax reform was [1] shown to substantially improve efficiency because consumption tax is more efficient than that on wages. It substantially increased GDP, consumption and investment. Removal of the progressive labor income tax, however, deteriorated distribution across income groups. Moreover, the asset holdings of low income groups were reduced. As discussed above, the reduction of the progressivity in the labor income tax caused the reallocation of labor supply and consumption from old to young ages. The asset holdings of low-income groups were reduced because the relative magnitude of their labor supply reallocation was smaller compared to that of consumption.
Replacement of the taxes on capital income and corporations with VAT ([2], [3]) also improved the efficiency of the economy. They increased GDP, consumption and investment, and such structural transformation of taxation from that on capital to a consumption tax raised investment and capital accumulation more than labor supply.11) No significant change was seen in distribution because of the difference in savings behavior across income groups.
The efficiency gain from the fundamental tax reform was shown as larger for [1] than for [2] or [3]. In ordinary cases, the distortion of corporate tax was larger than that of labor income tax. But replacement of the labor income tax rate with VAT increased efficiency more than that of the corporate tax in Algeria, because the labor income tax was progressive and the level of marginal tax rate was high. The rate of the capital income tax was proportional (7 percent), and the effective marginal corporate tax was about 4-6 percent. The income tax rate for marginal labor was much higher than that of capital income or the effective marginal corporate tax rate.12) The inefficiency of the labor income tax was also due to a narrow tax base. [Figure 2-3] shows that for most production sectors, the share of labor income was extremely low. Raising tax revenue 2.2 (5.2) times that of corporate (capital income) tax from a small tax base was another important source of inefficiency.
11) The magnitude of GDP increase was smaller than that of capital increase, indicating that capital input increased more than labor input because we did not assume technological progress. 12) The effective marginal corporate tax rate is computed as the proportional change in the cost of capital between a benchmark case and Case [3].
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 101
Effects of Structural Tax Reform[1]2) [2]2) [3]2)
GDP1) 6.72 1.01 1.47 Capital1) 6.76 0.70 1.66 Consumption1) 7.85 -0.13 0.05 Domestic Consumption1) 8.43 0.45 0.48 Investment1) 9.22 3.14 5.04 Gov’t Expenditures(Tax revenue)1) -0.05 0.04 0.02 Nat’l Savings rate (%) 23.2 23.3 23.5 Export (Import)1) 5.38 0.09 0.81 Exchange rate1) 2.03 2.06 0.76 Proportion of Revenue Labor inc. Tax 0.0 12.5 12.5 Capital inc. Tax 2.4 0.0 2.5 Consumption Tax (Domestic) 18.6 14.2 15.9 Consumption Tax (Imported) 19.9 16.9 17.9 Corporate Tax 5.6 5.4 0.0 PAT 5.3 5.1 5.1 Oil Revenue 48.2 45.9 46.2
Note: 1) Growth Rate (%). 2) [1] Remove labor income tax & impose flat rate (8.5%) VAT. [2] Remove capital income tax flat rate (7.0%) VAT. [3] Remove corporate tax & impose flat rate (8.1%) VAT.
102 • 2015/16 Knowledge Sharing Program with Algeria [Figure 2-19] Distributional Effects (Plan [1])
After-Tax Labor Income Wealth
20 25 20 15 15 10 10 5 Unit: % Unit: % 5 0 -5 0 -10 Group1 Group2 Group3 Group4 Group5 Group1 Group2 Group3 Group4 Group5
Income group Income group
Change In After-Tax Labor Income Change in Consumption 80 25
60 20 Group1 Group1 40 15 Group2 Group2 20 Group3 10 Group3 0
Unit: % Group4 Unit: % 5 Group4 -20 Group5 0 Group5 -40 -5 -60
-80 -10 21 31 41 51 61 71 21 31 41 51 61 71
age age
[Figure 2-20] Change in Effective Tax Rate
Marginal Labor Income Tax Marginal Effective Corporation Rate Change([1]) Tax Rate Change ([3]) 5.00 0
-1 0.00 Group1 Group1 -2 -5.00 Group2 Group2 Group3 -3 Group3 -10.00
Unit: % Group4 Unit: % -4 Group4 -15.00 Group5 -5 Group5
-20.00 -6
-25.00 -7 21 31 41 51 61 71 1 2 3 4 5 6 7 8 9 10111213141516171819 age age
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 103 5. Conclusion
We tried to build a general equilibrium simulation model to study the socioeconomic effects of taxation in Algeria. The model was a multi-income-class OLG type with multi-production sectors that enabled the analysis of distributional effects of taxation, as well as the effects of differential taxation using varying effective tax rates across production sectors. The model was calibrated to reflect the economy and tax policies of Algeria.
We simulated tax revision plans reflecting the requests from the Algerian government, including on the revision of VAT, corporate tax, labor income tax and Professional Activity Tax (TAP). We assumed that the government budget was balanced, as in the change in tax revenue induced the same amount of change in government expenditures. The policy simulation results are summarized as follows. First, government spending financed by the rise in VAT revenue resulting from a hike in the effective VAT rate based on the revision plan of the Algerian government was ineffective in improving macroeconomic variables. This was because the rise in the VAT rate raised the after-tax price of domestically produced goods and services. Second, lowering the corporate tax rate, which the Algerian government plans to implement, was also ineffective in raising investment and GDP, because differential taxation across production sectors deteriorated. Third, the decrease in the progressivity of labor income taxation substantially improved macroeconomic variables but eroded the distribution of wealth and labor income. Finally, lowering the TAP rate boosted the efficiency of resource allocation. TAP was imposed on intermediate inputs as well as final demand. So the prices of domestically produced goods and services were raised cumulatively in the process of production. In addition, TAP was imposed only on domestically produced goods and services. These aspects of the tax resulted in the distortion of resource allocation.
In addition to the policy experiments, we simulated a more fundamental tax reform. The structural transformation of taxation from being based on the labor income tax (or capital income tax) to being based on the consumption tax improved efficiency. The replacement of labor income tax with consumption tax, however, worsened the distribution of labor income and wealth.
To improve the simulation model, the calibration of the model needs to be revised with more detailed data. First, the I-O table needs to be improved. At present, the I-O table of Algeria does not separately report the proportion of imported goods for intermediate inputs, final consumption, investment and government consumption. This causes an incorrect calculation of resource allocation among the items of final and intermediate input demand. Second, the model needs to reflect the different preferences for consumption goods across income
104 • 2015/16 Knowledge Sharing Program with Algeria groups. This revision will enable analysis of the distributional effects of consumption taxation across income groups. Finally, the model needs to reflect more detailed information on tax incentives for a more thorough analysis of corporate tax.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 105 References
Adelman, Irma and Sherman Robinson, Income Distribution Policy in Developing Countries: a Case Study of Korea, London: Oxford University Press, 1978. Auerbach, Alan, Lawrence Kotlikoff, and Jonathan Skinner, “The Efficiency Gains from Dynamic Tax Reform”, International Economic Review, Vol. 24, 1983, pp.81-100. Auerbach, Alan, and Lawrence Kotlikoff, Dynamic Fiscal Policy, Cambridge University Press: New York, 1987. Bouet, Antoine, The Expected Benefits of Trade Liberalization for World Income and Development: Opening the "Black Box" of Global Trade Modeling, International Food Policy Research Institute, 2008. Cho, Gyeong Lyeob, and Wongun Song, “The KERI-CGE Model for Analysis on the Economic Effects of Free Trade Agreements – Economic Effects of Korea·EU FTA”, Research Report 09-1, Korea Economic Research Institute, 2009. Cooley, Thomas F. (ed.), Frontier of Business Cycle Research, Princeton University Press, 1995. Fullerton, Don, and Diane Lim Rogers, Who Bears the Lifetime Tax Burden?, Brooking Institution: Washington, 1993. Ministry of Labor of Korea, Survey of Wage Structure, each year. Piermartini, Roberta and Robert Teh, “Demystifying Modelling Methods for Trade Policy”, Discussion Paper No. 10, World Trade Organization, Geneva, 2005. Shoven, John, and John Walley, “A General Equilibrium Calculation of the Effects of Differential Taxation of Income from Capital in the U.S.”, Journal of Public Economics, Vol. 1, 1972, pp.281-321. Shoven, John, and John Walley, “General Equilibrium with Taxes: A Computable Procedure and an Existence Proof”, Review of Economic Studies, Vol. 40, 1973, pp.475-490. Shoven, John, and John Walley, “Applied General Equilibrium Models of Taxation and International Trade”, Journal of Economic Literature, Vol. 22, 1984, pp.1007-1051.
106 • 2015/16 Knowledge Sharing Program with Algeria Appendix
Appendix 1: Structure of Economy
Commodity Markets (Commodity Price) Commodity supply Expenditure Revenue
Commodity demand VAT, PAT, Excise TAX
Tax Revenue Intermediate Input PAT
Household Government Firms
Expenditure
Import Tariff, VAT
International Market Corporation Tax Labor, Capital Demand (Exchange Rate) Capital Cost Labor Cost
Fund Inflow
Fund outflow Export Oil Tax, PAt Labor Income Capital Income
Labor, Capital supply Labor Income Tax Capital Income Tax Foreigners
Factor Market (Wage, Rate of Return)
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 107 Appendix
Appendix 2: SIntermediate Input Matrix(AD, AM, 19 sectors)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
1 0.0214 0.0000 0.0000 0.0009 0.0000 0.0017 0.0000 0.0000 0.0017 0.1843 0.0000 0.0000 0.0017 0.0000 0.0300 0.0120 0.0043 0.0009 0.0000
2 0.0250 0.1170 0.0080 0.0040 0.0110 0.0920 0.1160 0.0200 0.0160 0.0230 0.0000 0.0000 0.0040 0.0010 0.0870 0.0500 0.0220 0.0120 0.0700
3 0.0010 0.0038 0.1203 0.0144 0.0000 0.0000 0.0000 0.0058 0.0000 0.0029 0.0000 0.0000 0.0000 0.0000 0.0366 0.0067 0.0000 0.0000 0.0000
4 0.0000 0.0000 0.1430 0.4090 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
5 0.0040 0.0000 0.0000 0.0087 0.0000 0.1582 0.0445 0.4802 0.0191 0.0032 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
6 0.0046 0.0007 0.0004 0.0004 0.0000 0.0064 0.0000 0.0256 0.0000 0.0004 0.0000 0.0000 0.0000 0.0000 0.0057 0.0018 0.0000 0.0000 0.0000
7 0.0009 0.0000 0.0009 0.0312 0.0000 0.0026 0.0017 0.4352 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0009 0.0000 0.0000 0.0009 0.0000
8 0.0000 0.0050 0.0040 0.0030 0.0010 0.0030 0.0010 0.0010 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0070 0.0010 0.0000 0.0010 0.0000
9 0.0294 0.0032 0.0000 0.0000 0.0014 0.0069 0.0005 0.0704 0.0221 0.0000 0.0000 0.0000 0.0005 0.0009 0.0363 0.0110 0.0000 0.0009 0.0000
10 0.0230 0.0000 0.0000 0.0000 0.0000 0.0015 0.0000 0.0031 0.0046 0.0092 0.0000 0.0000 0.0000 0.0000 0.0054 0.0161 0.0054 0.0000 0.0000
11 0.0110 0.0069 0.0000 0.0000 0.0006 0.0306 0.0017 0.0202 0.0116 0.0006 0.0763 0.0000 0.0075 0.0000 0.0561 0.0566 0.0006 0.0046 0.0023
12 0.0069 0.2437 0.0000 0.0000 0.0192 0.2075 0.0245 0.0005 0.0096 0.0000 0.0314 0.0410 0.0234 0.0261 0.0000 0.0000 0.0000 0.0037 0.1266
13 0.0174 0.0037 0.0073 0.0252 0.0023 0.0170 0.0046 0.1808 0.0064 0.0009 0.0000 0.0000 0.0106 0.0014 0.0312 0.0280 0.0009 0.0106 0.0000
14 0.0092 0.0035 0.0000 0.0000 0.0007 0.0099 0.0007 0.0085 0.0007 0.0007 0.0000 0.0000 0.0000 0.0014 0.0382 0.1753 0.0000 0.0276 0.0000
15 0.0067 0.0010 0.0162 0.0000 0.0010 0.0048 0.0000 0.0048 0.0010 0.0010 0.0000 0.0000 0.0000 0.0000 0.0210 0.0258 0.0000 0.0000 0.0007
16 0.0320 0.0030 0.0130 0.0029 0.0010 0.0140 0.0020 0.2340 0.0100 0.0240 0.0010 0.0000 0.0010 0.0000 0.0310 0.0250 0.0040 0.0020 0.0000
17 0.0064 0.0237 0.0000 0.0009 0.0009 0.0064 0.0009 0.0183 0.0009 0.0009 0.0000 0.0000 0.0000 0.0000 0.1278 0.0520 0.0009 0.0082 0.0000
18 0.0142 0.0003 0.0434 0.0010 0.0000 0.0000 0.0000 0.0112 0.0000 0.0159 0.0000 0.0000 0.0000 0.0000 0.0020 0.0003 0.0000 0.0003 0.0000
19 0.0470 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0280 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.1750 0.0000 0.0000 0.0000 0.0000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
1 0.0036 0.0000 0.0000 0.0001 0.0000 0.0003 0.0000 0.0000 0.0003 0.0307 0.0000 0.0000 0.0003 0.0000 0.0050 0.0020 0.0007 0.0001 0.0000
2 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0010 0.0000 0.0000 0.0000 0.0000 0.0000
3 0.0000 0.0002 0.0048 0.0006 0.0000 0.0000 0.0000 0.0002 0.0000 0.0001 0.0000 0.0000 0.0000 0.0000 0.0014 0.0003 0.0000 0.0000 0.0000
4 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
5 0.0010 0.0000 0.0000 0.0023 0.0000 0.0408 0.0115 0.1238 0.0049 0.0008 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
6 0.0084 0.0013 0.0006 0.0006 0.0000 0.0116 0.0000 0.0464 0.0000 0.0006 0.0000 0.0000 0.0000 0.0000 0.0103 0.0032 0.0000 0.0000 0.0000
7 0.0001 0.0000 0.0001 0.0048 0.0000 0.0004 0.0003 0.0668 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0001 0.0000 0.0000 0.0001 0.0000
8 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
9 0.0346 0.0038 0.0000 0.0000 0.0016 0.0081 0.0005 0.0826 0.0259 0.0000 0.0000 0.0000 0.0005 0.0011 0.0427 0.0130 0.0000 0.0011 0.0000
10 0.0071 0.0000 0.0000 0.0000 0.0000 0.0005 0.0000 0.0009 0.0014 0.0028 0.0000 0.0000 0.0000 0.0000 0.0016 0.0049 0.0016 0.0000 0.0000
11 0.0080 0.0051 0.0000 0.0000 0.0004 0.0224 0.0013 0.0148 0.0084 0.0004 0.0557 0.0000 0.0055 0.0000 0.0409 0.0414 0.0004 0.0034 0.0017
12 0.0061 0.2143 0.0000 0.0000 0.0168 0.1825 0.0215 0.0005 0.0084 0.0000 0.0276 0.0360 0.0206 0.0229 0.0000 0.0000 0.0000 0.0033 0.1114
13 0.0206 0.0043 0.0087 0.0298 0.0027 0.0200 0.0054 0.2132 0.0076 0.0011 0.0000 0.0000 0.0124 0.0016 0.0368 0.0330 0.0011 0.0124 0.0000
14 0.0038 0.0015 0.0000 0.0000 0.0003 0.0041 0.0003 0.0035 0.0003 0.0003 0.0000 0.0000 0.0000 0.0006 0.0158 0.0727 0.0000 0.0114 0.0003
15 0.0003 0.0000 0.0008 0.0001 0.0000 0.0002 0.0000 0.0002 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0010 0.0012 0.0000 0.0000 0.0000
16 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
17 0.0006 0.0023 0.0000 0.0001 0.0001 0.0006 0.0001 0.0017 0.0001 0.0001 0.0000 0.0000 0.0000 0.0000 0.0122 0.0050 0.0001 0.0008 0.0000
18 0.0278 0.0007 0.0846 0.0020 0.0000 0.0000 0.0000 0.0218 0.0000 0.0311 0.0000 0.0000 0.0000 0.0000 0.0040 0.0007 0.0000 0.0007 0.0000
19 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
108 • 2015/16 Knowledge Sharing Program with Algeria Appendix 3: Taxes in Algeria
Classification Type Liability Tax Base Tax Rate Persons & companies Income = Professional (firms) practicing trade, proceeds - Profit Tax craft activities or liberal charges professions Progressive rates 0, 20, 30, 35% Agriculture Ranching & agricultural Income items Income Tax activities administered. Income -7% for housing Rental Renters of built & built-in Gross amount Tax -15% for business & Income Tax properties for civilians of rent professional premises Natural persons & companies practicing trade, Unified -5% for production activities craft activities or liberal Turnover Flat Tax -12% for other activities professions with turnover of ≤30,000,000 DA. -Progressive rates 0, 20, 30, 35% Withholding tax by Taxable salary Work Salary (wage) -10% for secondary activities employer with employee's = gross salary Tax Tax -Tax abatement of 40% responsibility. - payroll tax between 1,000 and 1,500 DA / month on global income tax -10% for nationals or legal Gross residents distributed -15% for individuals or non- amount resident who are legal Dividends -Transfer of membership 15% shares add Shareholders, depositors & value. savers (Withholding) -10% for resident nationals Interests -15% for non-residents from Deposit - -50% for anonymous or bearer Accounts of titles Part of interest 1% Interest ≤50 000 DA Capital from Saving Tax Part of interest Accounts 10% > 50 000DA -Net value exceeding 30 - Built & built-in properties Patrimony million Progressive rates -Real rights of real estate Tax -DA on 0, 0.25, 0.5, 0.75, 1, 1.5% -Movables January 1st of tax year 5% mutation & usufruct 2% or 5% enjoyment Real estate transactions, 3% donation Registration Value declared successions & companies' 1.5% share Fees in deed deeds 2.5% exchange 0.5% capital contributions 2.5% share transfer
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 109 Appendix
Classification Type Liability Tax Base Tax Rate
Turnover Industrial, business, import (Due VAT = & craft activities done by VAT VAT on sale 0%, 7%, 17% producers, wholesalers, -VAT on importers & retailers. purchases)
Depending on degree of processing: -5% for raw materials Custom Customs Import operations -15% for semi-finished products & Consumption Duties valuation Tax equipment -30% for finished products and vehicles Customs Consumption Sale & import of tobacco, valuation (for -Fixed amount per unit or Domestic Tax beer & other products imports) or -Ad valorem rate turnover Customs Oil Product Wholesale & imported oil valuation (for -Tariff: fixed amount per unit Tax products imports) or turnover -19% for goods production -Corporations -23% for works & public building, Net profit = Corporate -Limited liability companies tourism & thermal activities Corporate Tax (proceeds - Profit Tax (LLCs) except travel agencies charges) -Unipersonal LLCs -26% for other activities
Product - Fixed amount per unit (HL) of Production & sale of alcohol quantity alcohol Traffic Fees & sugar or glucose used in released for - Different amount depending on making appetizers consumption consumption goods Indirect Tax - Fixed amount per unit Warranty & Gold, silver or platinum pieces Product weight - Different amount depending on Test Tax of work consumption goods Health Tax on Net meat Red meat 10 DA / Kg Meat weight Production value = (quantities Research & produced 5.5-23% of production value Exploitation Oil royalties or tax (RP) -amount depending on output level per day Stage excluded) *price – Pipeline transportation Oil Tax Sales of crude 30% or 70% depending on Tax on oil revenue Oil revenue Oil stage production threshold Additional tax on income (ICR) Superficiary tax (TS) Transfer tax (TTR) Tax flaring (TTO) Other Taxes - - Tax for using water (TEU) Land tax Gas emission credit tax (TEC) Tax on exceptional gains (TPE) -1% for production activities Activities related to trade, Overall sales or -2% for other activities with 25% Professional industry (manufacturing, TAP gross revenues allowance Activity Tax building works, service - taxes -3% for turnover from pipeline delivery) transactions
Source: Ministry of Finance, Algeria
110 • 2015/16 Knowledge Sharing Program with Algeria Appendix 4: Table of Tax Depreciation Rates (Application Rules)
Asset Class Application Rate - Commercial buildings 2-5% - Industrial buildings 5% - Ordinary homes for living 1-2% - Homes for workers (staff housing) 3-4% - Equipment 10-15% - Tools 10-20% - Cars & automotive equipment 20-25% - Furniture 10% - Office furniture 10-20% - Fittings & facilities 5-10% - Brevets & certificates 20% - IT hardware 20-33%
Source: Ministry of Finance, Algeria.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 111 Appendix
Appendix 5: Revenue Regulation Fund (RRF)
A special trust entitled "Revenue Regulation Fund" was established under Article 10 of Algeria’s Complementary Law of Finance of 2000 with the finance minister in charge. This is dinar-denominated fund held with the Public Treasury was placed within the Bank of Algeria under special account No. 12410 10500 X entitled "Trust Funds with the Bank of Algeria."
The RRF hosts oil (hydrocarbon) revenues when the price of oil exceeds U.S.$37 a barrel to help to fund programs aiding economic recovery.
Per the Complementary Law of Finance of 2006, the regulatory fund is expected to take over the treasury deficit under Article 25, which says the RRF’s balance cannot fall under 740 billion dinars.
The RRF is powered by the capital gain generated by the positive difference between the results of oil taxation (market price) and Finance Act forecasts (reference price of U.S.$37). In addition to the public debt of the regulation, this surplus value is used to partially finance the treasury deficit in combination with other financing sources (debt, banking and non-bank financing). Table A5.1. Fund Flow of RRF
Year Fund at the end of previous year Fund inflow Fund Outflow Fund/GDP (%) 2000 0 453,237 221,100 5.6 2001 232,137 123,864 184,467 4.1 2002 171,534 26,504 170,060 0.6 2003 27,978 448,914 156,000 6.1 2004 320,892 623,499 222,703 11.7 2005 721,688 1,368,836 247,838 24.4 2006 1,842,686 1,798,000 709,641 34.4 2007 2,931,045 1,738,848 1,454,363 34.4 2008 3,215,530 2,288,159 1,223,617 38.8 2009 4,280,072 400,675 364,282 43.3 2010 4,316,465 1,318,310 791,937 40.4 2011 4,842,837 2,300,320 1,761,454 37.0 2012 5,381,703 2,535,309 2,283,260 35.0 2013 5,633,752 2,062,231 2,132,471 33.6 2014 5,563,512 1,810,625 2,965,672 24.9
Source: Ministry of Finance, Algeria.
112 • 2015/16 Knowledge Sharing Program with Algeria Appendix 6: Resource Allocation of Households at Benchmark Economy
Before-Tax Labor Income1) 6
5
4
3
2
1
0 21 31 41 51 61 71 age
After-Tax Labor Income1) 6
5
4
3
2
1
0 21 31 41 51 61 71 age Group1 Group2 Group3 Group4 Group5
Note: 1) Ratio to the value for one aged 21 in Income Group 1.
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 113 Appendix
Consumption1) 7
6
5
4
3
2
1
0 21 31 41 51 61 71 age Note: 1) Ratio to the value for one of aged 21 in income group 1.
Wealth 16 14 12 10 8 6 4 2 0 -2 21 31 41 51 61 71 81 age Group1 Group2 Group3 Group4 Group5
114 • 2015/16 Knowledge Sharing Program with Algeria Average Labor Income Tax Rate 0.12
0.1
0.08
0.06
0.04
0.02
0 21 31 41 51 61 71 age Source: Author’s calculation
Marginal Labor Income Tax Rate 0.25
0.2
0.15
0.1
0.05
0 21 31 41 51 61 71 age Group1 Group2 Group3 Group4 Group5
Chapter 2 _Construction of Micro-simulation Model for Analysis of Socioeconomic Effects of Tax Policy in Algeria • 115
2015/16 Knowledge Sharing Program with Algeria
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