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Using Microsimulation to Optimize an Income Transfer System Towards Poverty Reduction

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  • Seppo Sallila

Abstract

In this study, a static microsimulation model SOMA is used to optimize Finland's tax-benefit legislation to alleviate poverty or at least to reduce it significantly. The method is a classical optimization method using a greed optimization strategy. This means an iterative process, where only one poverty diminishing parameter is changed by 10% from its earlier value at each iteration. Expenses are also optimized to reduce inequality as measured by the Gini-coefficient. Revenues and expenses are balanced at every iteration. Certain parameters of social assistance were found to be the most effective in reducing poverty. However by raising substantially the basic unemployment benefit, basic pensions, housing benefits and study grants - leaving social assistance untouched - poverty was reduced by under 50 percent. This means that social assistance is still required to reduce poverty further. Costs are most effectively financed by raising capital income tax.

Suggested Citation

  • Seppo Sallila, 2010. "Using Microsimulation to Optimize an Income Transfer System Towards Poverty Reduction," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 13(1), pages 1-1.
    • Handle: RePEc:jas:jasssj:2008-2-3
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    References listed on IDEAS

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    1. Anthony Barnes Atkinson, 2005. "EUROMOD and the Development of EU Social Policy," Discussion Papers of DIW Berlin 467, DIW Berlin, German Institute for Economic Research.
    2. Holly Sutherland, 2002. "Indicators for Social Inclusion in the European Union: the Impact of Policy Changes and the Use of Microsimulation Models," Politica economica, Società editrice il Mulino, issue 1, pages 117-120.
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