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A Microsimulation Approach to an Optimal Swedish Income Tax

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  • Ericson, Peter

    ()
    (Empirica)

  • Flood, Lennart

    ()
    (University of Gothenburg)

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 behavioral responses 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 suggest 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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4379.

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Length: 59 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4379

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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. Jeffrey M. Wooldridge, 2005. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 20(1), pages 39-54.
  2. Richard Blundell & Andrew Shephard, 2008. "Employment, hours of work and the optimal taxation of low income families," IFS Working Papers, Institute for Fiscal Studies W08/01, Institute for Fiscal Studies.
  3. François Bourguignon & Amedeo Spadaro, 2006. "Microsimulation as a Tool for Evaluating Redistribution Policies," Working Papers, ECINEQ, Society for the Study of Economic Inequality 20, ECINEQ, Society for the Study of Economic Inequality.
  4. 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.
  5. Vermeulen, Frederic, 2002. " Collective Household Models: Principles and Main Results," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(4), pages 533-64, September.
  6. Rolf Aaberge, 2000. "Characterizations of Lorenz curves and income distributions," Social Choice and Welfare, Springer, Springer, vol. 17(4), pages 639-653.
  7. 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).
  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. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(3), pages 1039-1073, August.
  10. 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.
  11. Ericson, Peter & Flood, Lennart & Wahlberg, Roger, 2009. "SWEtaxben: A Swedish Tax/Benefit Micro Simulation Model and an Evaluation of a Swedish Tax Reform," IZA Discussion Papers 4106, Institute for the Study of Labor (IZA).
  12. Flood, Lennart & Pylkkänen, Elina & Wahlberg, Roger, 2003. "From Welfare to Work: Evaluating a Proposed Tax and Benefit Reform Targeted at Single Mothers in Sweden," IZA Discussion Papers 891, Institute for the Study of Labor (IZA).
  13. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
  14. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, Elsevier, vol. 7(2), pages 203-235, April.
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Cited by:
  1. Tim Goedemé & Karel Van den Bosch & Lina Salanauskaite & Gerlinde Verbist, 2013. "Testing the Statistical Significance of Microsimulation Results: Often Easier than You Think. A Technical Note," ImPRovE Working Papers, Herman Deleeck Centre for Social Policy, University of Antwerp 13/10, Herman Deleeck Centre for Social Policy, University of Antwerp.
  2. Laun, Lisa, 2012. "The effect of age-targeted tax credits on retirement behavior," Working Paper Series, IFAU - Institute for Evaluation of Labour Market and Education Policy 2012:18, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  3. 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.
  4. Creedy, John, 2013. "Alternative Distributions for Inequality and Poverty Comparisons," Working Paper Series 2851, Victoria University of Wellington, Chair in Public Finance.
  5. Boeters, Stefan, 2010. "Optimal tax progressivity in unionised labour markets: Simulation results for Germany," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 10-035, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Creedy, John & Hérault, Nicolas, 2012. "Decomposing Inequality and Social Welfare Changes: The Use of Alternative Welfare Metrics," Working Paper Series 2432, Victoria University of Wellington, Chair in Public Finance.
  7. 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).
  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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