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Measuring the Deadweight Loss from Taxation in a Small Open Economy. A general method with an application to Sweden

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  • Peter Birch Sørensen

    (Department of Economics, University of Copenhagen)

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 develops 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 highlight the importance of accounting for the interaction between the major tax bases when estimating deadweight loss.

Suggested Citation

  • Peter Birch Sørensen, 2011. "Measuring the Deadweight Loss from Taxation in a Small Open Economy. A general method with an application to Sweden," EPRU Working Paper Series 2011-03, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:epruwp:11-03
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    References listed on IDEAS

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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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