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The end of the flat tax experiment in Slovakia: An evaluation using behavioural microsimulation in a dynamic macroeconomic framework

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  • Horváth, Michal
  • Senaj, Matúš
  • Siebertová, Zuzana
  • Švarda, Norbert
  • Valachyová, Jana

Abstract

The paper introduces a new way of linking microsimulation models with dynamic general equilibrium frameworks to obtain an evaluation of the impact of detailed tax and benefit measures on the aggregate economy. In the approach presented in this paper, income heterogeneity interacts with the macro-economy via aggregated individual labour supply decisions which influence, and are influenced by, the dynamic evolution of the real wage rate. The method involves a reduced-form representation of the information flow between the macroeconomic and microeconomic blocks. The practical usefulness of the approach is demonstrated by evaluating actual and hypothetical tax reforms that involve abandoning the flat tax system in Slovakia. A hypothetical move to a highly progressive tax structure is shown to generate some employment gains but is associated with a drop in aggregate income and tax revenue.

Suggested Citation

  • Horváth, Michal & Senaj, Matúš & Siebertová, Zuzana & Švarda, Norbert & Valachyová, Jana, 2019. "The end of the flat tax experiment in Slovakia: An evaluation using behavioural microsimulation in a dynamic macroeconomic framework," Economic Modelling, Elsevier, vol. 80(C), pages 171-184.
    • Handle: RePEc:eee:ecmode:v:80:y:2019:i:c:p:171-184
    DOI: 10.1016/j.econmod.2018.11.005
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    Cited by:

    1. Michal Horvath & Zuzana Siebertova, 2019. "Employment Effects of Income Tax Reforms: Lessons from Slovakia," Working Papers Working Paper No. 3/2019, Council for Budget Responsibility.
    2. Jana Valachyova & Matus Senaj, 2023. "The impact of unexpected inflationary shock in 2022 and 2023 on the welfare of families: The case of Slovakia," Working Papers Working Paper No. 2/2023, Council for Budget Responsibility.
    3. Mitkova Veronika & Jánošová Miroslava, 2019. "The Tax Burden CGE Analysis for Slovakia and Slovenia," Naše gospodarstvo/Our economy, Sciendo, vol. 65(4), pages 35-46, December.

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    More about this item

    Keywords

    Microsimulation; Dynamic general equilibrium; Unemployment; Labour supply elasticity; Tax reform; Flat tax;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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