Population ageing and fiscal sustainability: An integrated micro-macro analysis of required tax changes
AbstractMost studies on the economic consequences of ageing rely on Computable General Equilibrium (CGE) models that account for feedback mechanisms through changes in relative prices, tax bases etc. However, since individual labour supply behaviour is considered to be a key element in CGE-analyses of fiscal sustainability problems, the results of these analyses may depend crucially on how the labour supply behaviour is modelled. The current practice of combining a simplified representation of the tax and transfer system with the labour supply behaviour of a few representative agents may render a misleading description of incentives and revenue effects. The purpose of this paper is to demonstrate the importance of using an alternative strategy by integrating a detailed microeconometric model of labour supply, that is sufficiently flexible to capture a large variety of labour supply responses, with a large-scale CGE model. The integrated micro-macro CGE model is employed to explore how endogenous household labour supply behaviour affects and interacts with sustainability problems in Norway. The empirical results suggest that the required increase in the future tax burden is less dramatic when the analysis allows for a flexible representation of the labour supply behaviour. Moreover, by replacing the current progressive tax system with a flat tax system it is found that the pressure on future public finances is significantly reduced.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 367.
Date of creation: Feb 2004
Date of revision:
Population Ageing; Fiscal Sustainability; Labour Supply; Computable General Equilibrium;
Other versions of this item:
- Rolf Aaberge & Ugo Colombino & Erling Holmøy & Birger Strøm & Tom Wennemo, 2004. "Population ageing and fiscal sustainability: An integrated micro-macro analysis of required tax changes," CHILD Working Papers wp06_04, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
- J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-14 (All new papers)
- NEP-PBE-2004-03-14 (Public Economics)
- NEP-PUB-2004-03-14 (Public Finance)
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