Microsimulation of indirect taxes

Publication type:

Journal Article

Authors

Andre DeCoster, Jason Loughrey, Cathal O'Donoghue and Dirk Verwerft

Publication date

1 Jun 2011

Summary

The goal of this paper is to simulate a tax shift from labour to consumption and perform a distributional analysis of the reform. Microsimulation programs are often uniquely focussed on the personal income tax system and on social security contributions and benefits. However, against a political background where income taxes are under increased pressure and alternative, less distortive forms of taxation come under consideration, microsimulation models enriched with expenditure data and consumption tax structures could play an important role in sharpening the (distributional) picture of such systemic changes. The current paper discusses an algorithm for this enrichment - mainly with VAT, excises and other consumption taxes - within the context of the EUROMOD-framework and applies the obtained program to the simulation of a decrease of social security contributions compensated by a rise in standard VAT rate to maintain government budget neutrality for four EU countries. The measure is found to have a (first order) regressive effect, pointing to the fact that keeping redistribution constant would require the remaining post-reform income taxation to become more progressive.

Published in

International Journal of Microsimulation

ISSN

16

Subjects

Microsimulation and Taxation

Links

http://www.microsimulation.org/ijm/issues/volume-42-autumn-2011/