GROSS-NET CONVERSION ISSUES Gianni Betti, Vijay Verma Università degli Studi di Siena 1. Introduction The basic requirement in EU-SILC (EU Statistics on Income and Living Conditions) concerning income variables is to record gross income in specified detail at the personal and income component level, but disposable income only as a set of three variable at the total household level. There may be severe practical difficulties for some Member States in collecting income data exactly in this form, whether the data are obtained from registers or directly from respondents in sample surveys. The objective of this paper 1 is to develop, test and recommend procedures on how this problem may be overcome. Both in theory and in practice, this is a complex task. The modelling procedure for net-gross transformation can range from the very complex to the very simple. At the sophisticated end of the spectrum, tax and social insurance contributions are imputed in as exact a manner as possible using a tax-contribution model, therefore requiring full information on the tax regime operating in a particular country during the reference period. In developing a such sophisticated approach, one possibility is for each Member State to use their own micro-simulation model to provide the output variables required to construct the EU income definition where they are not collected directly from the survey. If such models were to be built from scratch, they would require considerable effort in collating information about the tax regime in each country and repeating it annually. However, many countries have already developed their own models in order to explore the impact of different tax-benefit policies. Such models incorporate household micro-data from nationally representative sources and calculate disposable income for each household under alternative tax/benefit regimes. Although the aim of such models is to simulate the impact of policy changes and so the usual output consists of the micro- level change in household disposable incomes as a result of policy change, they could equally well be used to estimate tax/social insurance contributions under a single tax/benefit regime – as is required for EU-SILC. Euromod provides a well-known example of such modelling in EU-wide context. Complex models may not be feasible or necessary in all cases. There can be simpler models which take into account only the major elements of the tax regime, and provide sets of ratios or factors which can be applied to individual income components. Alternatively, one may pursue more purely statistical approaches. These are likely to be simpler and more uniform across countries. For instance, net/gross ratios or conversion factors may be determined empirically (statistically) as functions of the household's level and composition of income, household size and composition, and other characteristics available in the survey. These relationships may be determined on the basis of aggregate 1 Part of the results reported in the paper have been reached in the research carried out within the project “Statistical Services in the Field of EU-SILC, Statistics on Income and Living Conditions. 2001/S 183-125349 LOT 2: Development of Appropriate modelling or imputation to Construct the EU-SILC Target Income Variables for each EU Member States”. 1