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Combining microsimulation and CGE models: Effects on equality of VAT reforms

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Author Info
Turid Avitsland (Research Department Statistics Norway)
Jorgen Aasness () (Research Department Statistics Norway)
Abstract

Microsimulation models are apt to be the preferred instrument when applied, equality analyses of tax reforms in specific economies are undertaken. However, most of these models ignore general equilibrium effects, like changes in prices, and may therefore miss valuable information because of their partial nature. In this paper we combine a microsimulation model and a CGE model through feeding of CGE results on producer prices, pre-tax nominal incomes, wealth and transfers into the microsimulation model. The two main reforms studied are substitution of a uniform VAT rate on all goods and services (called the general VAT reform) and substitution of the non-uniform Norwegian VAT reform of 2001 (called the political VAT reform) for the previous, differentiated system. We find that the degree of equality is clearly increased with the political VAT reform and unchanged with the general VAT reform. Comparing these results with the case where CGE effects are not taken into account, i.e. a "traditional" microsimulation analysis, we find that equality is still increased with the political VAT reform while equality is now also increased with the general VAT reform instead of being unchanged

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 132.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:132

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Keywords: micro-macro links; indirect taxation; VAT reforms; Equality;

Find related papers by JEL classification:
D3 - Microeconomics - - Distribution
D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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