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A Microsimulation Approach to an Optimal Swedish Income Tax

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  • Ericson, Peter

    (Empirica)

  • Flood, Lennart

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

This paper follows the theory of optimal taxation and the goal is to identify a tax/benefit design that maximizes social welfare. A two stage process is proposed where the individuals preferred choice of leisure and consumption is solved in the first stage, and the second stage identifies the tax/benefit system that maximize the social welfare function. Our study deviates from the mainstream literature as the first stage is based on a static micro simulation model with behavioral responses. The behavioralresponses take two different forms and use two different types of models; first binary models that describe mobility in/out from non-work states such as old age pension, disability, unemployment, long term sickness, and second models that describe change in working hours and welfare participation. Compared to the current Swedish income tax, our results suggests that increased basic deduction and in-work tax credit in combination with a reduction of the progressive national taxes would increase welfare. We also find strong support for increased housing allowances. The reforms are financed by a tax based on the same tax base as the proportional municipal income tax.

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File URL: http://hdl.handle.net/2077/20876
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Bibliographic Info

Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 375.

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Length: 58 pages
Date of creation: 25 Aug 2009
Date of revision:
Handle: RePEc:hhs:gunwpe:0375

Contact details of provider:
Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Keywords: Micro simulation; tax-benefit system; in-work tax credit reform; optimal taxation;

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References

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  1. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, Elsevier, vol. 7(2), pages 203-235, April.
  2. Ericson, Peter & Flood, Lennart & Wahlberg, Roger, 2009. "SWEtaxben: A Swedish Tax/benefit Micro Simulation Model and an Evaluation of a Swedish Tax Reform," Working Papers in Economics, University of Gothenburg, Department of Economics 346, University of Gothenburg, Department of Economics.
  3. François Bourguignon & Amadéo Spadaro, 2005. "Microsimulation as a tool for evaluating redistribution policies," PSE Working Papers halshs-00590863, HAL.
  4. Flood, Lennart & Pylkkänen, Elina & Wahlberg, Roger, 2003. "From Welfare to Work: Evaluating a Proposed Tax and Benefit Reform Targeted at Single Mothers in Sweden," Working Papers in Economics, University of Gothenburg, Department of Economics 107, University of Gothenburg, Department of Economics.
  5. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
  6. Aaberge, Rolf & Flood, Lennart, 2008. "Evaluation of an In-Work Tax Credit Reform in Sweden: Effects on Labor Supply and Welfare Participation of Single Mothers," IZA Discussion Papers 3736, Institute for the Study of Labor (IZA).
  7. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
  8. Lennart Flood & Jörgen Hansen & Roger Wahlberg, 2004. "Household Labor Supply and Welfare Participation in Sweden," Journal of Human Resources, University of Wisconsin Press, vol. 39(4).
  9. Arthur van Soest, 1995. "Structural Models of Family Labor Supply: A Discrete Choice Approach," Journal of Human Resources, University of Wisconsin Press, vol. 30(1), pages 63-88.
  10. Frederic Vermeulen, 2000. "Collective household models: principles and main results," Public Economics Working Paper Series, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics ces0028, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics.
  11. Richard Blundell & Andrew Shephard, 2012. "Employment, Hours of Work and the Optimal Taxation of Low-Income Families," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 481-510.
  12. Rolf Aaberge, 2000. "Characterizations of Lorenz curves and income distributions," Social Choice and Welfare, Springer, Springer, vol. 17(4), pages 639-653.
  13. Jeffrey M Wooldridge, 2002. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP18/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  14. Slemrod, Joel, 1990. "Optimal Taxation and Optimal Tax Systems," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(1), pages 157-78, Winter.
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Citations

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Cited by:
  1. Creedy, John, 2013. "Alternative Distributions for Inequality and Poverty Comparisons," Working Paper Series 2851, Victoria University of Wellington, Chair in Public Finance.
  2. Bargain, Olivier & Decoster, André & Dolls, Mathias & Neumann, Dirk & Peichl, Andreas & Siegloch, Sebastian, 2011. "Welfare, Labor Supply and Heterogeneous Preferences: Evidence for Europe and the US," IZA Discussion Papers 6102, Institute for the Study of Labor (IZA).
  3. Laun, Lisa, 2012. "The E ffect of Age-Targeted Tax Credits on Retirement Behavior," Research Papers in Economics, Stockholm University, Department of Economics 2012:14, Stockholm University, Department of Economics.
  4. John Creedy & Nicolas Hérault†, 2011. "Decomposing Inequality and Social Welfare Changes : The Use of Alternative Welfare Metrics," Department of Economics - Working Papers Series, The University of Melbourne 1121, The University of Melbourne.
  5. Goedemé, Tim & Van den Bosch, Karel & Salanauskaite, Lina & Verbist, Gerlinde, 2013. "Testing the Statistical Significance of Microsimulation Results: Often Easier than You Think. A Technical Note," EUROMOD Working Papers em18/13, EUROMOD at the Institute for Social and Economic Research.
  6. Tim Goedemé & Karel Van den Bosch & Lina Salanauskaite & Gerlinde Verbist, 2013. "Testing the Statistical Significance of Microsimulation Results: A Plea," International Journal of Microsimulation, Interational Microsimulation Association, vol. 6(3), pages 50-77.
  7. Boeters, Stefan, 2010. "Optimal tax progressivity in unionised labour markets: Simulation results for Germany," ZEW Discussion Papers 10-035, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. Lars-H. R. Siemers, 2014. "A General Microsimulation Model for the EU VAT with a specific Application to Germany," Volkswirtschaftliche Diskussionsbeiträge, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht 167-14, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.

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