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The Double Taxation of Savings and Economic Growth in Czech Republic

Zdenˇ ek Rosenberg

ESF MU

18.1.2013 Current trends in the public sector research ˇ Slapanice

Zdenˇ ek Rosenberg (ESF MU) The Double Taxation of Savings and Economic Growth in Czech Republic 18.1.2013 1 / 14

This presentation

Double taxation of savings Goals Agent-Based Cumputional Economics (ACE) Model Results Conclusion

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Double taxation of savings

In most countries the interest paid on already taxed savings is also taxed and this fact is part of the problem known as double taxation of

• savings. Additional taxation may cause lower levels of savings on the

behalf of consumption and so it may harm future economic growth through diminished accumulation of capital. J.S. Mill, A. Marshall and C.A. Pigou (Weaver, 1932), (Fisher, 1939), (Fossati, 2010)

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Goals

What would abolishing of the double taxation of savings do to economic growth?

Zdenˇ ek Rosenberg (ESF MU) The Double Taxation of Savings and Economic Growth in Czech Republic 18.1.2013 4 / 14

Goals

What would abolishing of the double taxation of savings do to economic growth? Simulation

The model simulates the abolishing of the double taxation of savings in the Czech economy and its impact on economic growth

• n the period of 40 years.

Zdenˇ ek Rosenberg (ESF MU) The Double Taxation of Savings and Economic Growth in Czech Republic 18.1.2013 4 / 14

Goals

What would abolishing of the double taxation of savings do to economic growth? Simulation

The model simulates the abolishing of the double taxation of savings in the Czech economy and its impact on economic growth

• n the period of 40 years.

Role of savings

Three settings of GDP growth rate sensitivity to savings are used (both with and without taxation).

Zdenˇ ek Rosenberg (ESF MU) The Double Taxation of Savings and Economic Growth in Czech Republic 18.1.2013 4 / 14

ACE

ACE (Agent-based computional economy) can be the long missed link between Micro and Macroeconomics (Saam, 1999). Agents characteristics, rules, decentralization Enviroment space, time, central authority (government), agregation, taxes... Purpose of ACE

prediction (precise calibration of model is needed) examination of complicated effects between multiple agents (transparency and intelligibilty)

ACE and taxes

ACE models are typically used for tax evasion modeling

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Model (1)

ACE model programmed in JAVA and with no GUI (NetLogo version is on the way) 10.000 agents with demographic characteristics copying those of Czech republic Time step = fiscal year. Years 2011-2050 are simulated. Setting with and without double taxation of savings. Increase in savings causes increased capital stock and so increases productivity of labour for next years.

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Model (2)

Some of the agent’s characteristics: Age Income (depends on age and also on random variable with normal distribution) Willingness to work (depends on income and age) Willingness to save Agents are born, die, lose and find work, save more before retirement...

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Results: Revenues

Within 10 years the revenues from personal income tax in settings without double taxation surpasses that of model with this taxation. Later, a slight drop is caused by lowering the rate of tax, which is made possible by the slightly faster GDP growth without double taxation.

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Results: Incomes

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Results: Unemployment

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Results: Growth rates

The cumulative effect for c = 0.5 seems somewhat significant but it is necessary to keep in mind that an obtained gain of 33.95% GDP is the product of 2011, which would be equal to only 5% gain in GDP in 2050.

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Results

The model showed that there is very little difference between systems with and without double taxation of savings unless the role of savings is srongly enhanced.

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Results

The model showed that there is very little difference between systems with and without double taxation of savings unless the role of savings is srongly enhanced. For the low impact of savings on economic growth the pretax income of agents grows quite well in the early years, reaching 37000 in 2035, but then the growth basically disappears because

• f the aging of the Czech population. This is true for an economy

both with and without the double taxing of savings.

Zdenˇ ek Rosenberg (ESF MU) The Double Taxation of Savings and Economic Growth in Czech Republic 18.1.2013 12 / 14

Conclusion

Abolishing the double taxation has very small but always positive impact on economic growth in the long run. The model also shows the surprisingly high impact of the Czech population’s aging on economic growth, especially when large previous savings cannot compensate for this gap.

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The end Thank you.

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