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Population ageing and fiscal sustainability: An integrated micro-macro analysis of required tax changes

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  • Rolf Aaberge

    ()

  • Ugo Colombino

    ()

  • Erling Holmøy

    ()

  • Birger Strøm
  • Tom Wennemo

Abstract

Most 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 CGEanalyses 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 Info

Paper provided by CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY in its series CHILD Working Papers with number wp06_04.

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Length: 52 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:wpc:wplist:wp06_04

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Keywords: Population Ageing; Fiscal Sustainability; Labour Supply; Computable General; Equilibrium;

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