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Measuring the deadweight loss from taxation in a small open economy

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  • Sørensen, Peter Birch

Abstract

The paper develops a simple general equilibrium framework for calculating the marginal deadweight loss from taxation in a small open economy. The framework allows a decomposition of the deadweight loss from each tax instrument into the losses stemming from the contraction of the different tax bases. The paper describes a method of calibrating the model which exploits the links between the various factor supply elasticities implied by the standard life cycle model. It also presents a method of estimating effective tax rates that is consistent with optimising household and firm behaviour. To illustrate how the model works, it is calibrated to a data set for Sweden. The quantitative results indicate that more than half of the marginal deadweight loss from taxes on capital may stem from their negative impact on the tax bases for labour income and consumption.

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  • Sørensen, Peter Birch, 2014. "Measuring the deadweight loss from taxation in a small open economy," Journal of Public Economics, Elsevier, vol. 117(C), pages 115-124.
    • Handle: RePEc:eee:pubeco:v:117:y:2014:i:c:p:115-124
    DOI: 10.1016/j.jpubeco.2014.06.001
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    More about this item

    Keywords

    Deadweight loss; Tax policy in a small open economy;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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