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The benefits and problems of linking micro and macromodels - Evidence from a flat tax analysis

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Abstract

Microsimulation (MS) and Computable General Equilibrium models (CGE) have both been widely used in policy analysis. Their combination allows the utilisation of the advantages of both types. The aim of this paper is to describe the state-of-the-art in simulation analysis and to illustrate the benefits and problems of linking micro and macro models by analysing flat tax reform proposals for Germany. Taking feedback effects into account has important implications for the evaluation of tax reforms. The analysis shows that a personal income flat tax can indeed overcome the fundamental equity efficiency trade-off while simultaneously increasing the tax revenue. However, this result does not hold for a flat tax combining a personal income flat tax with a corporate cash flow flat tax, even when allowing for an expost loss in revenue, as the top of the distribution still gains the most.

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  • Andreas Peichl, 2009. "The benefits and problems of linking micro and macromodels - Evidence from a flat tax analysis," Journal of Applied Economics, Universidad del CEMA, vol. 12, pages 301-329, November.
  • Handle: RePEc:cem:jaecon:v:12:y:2009:n:2:p:301-329
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    Cited by:

    1. Müller, Kai-Uwe, 2014. "Analyzing economic policies that affect supply and demand: a structural model of productivity, labor supply and rationing," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100471, Verein für Socialpolitik / German Economic Association.
    2. Peichl, Andreas & Schneider, Hilmar & Siegloch, Sebastian, 2010. "Documentation IZA?MOD: The IZA Policy SImulation MODel," IZA Discussion Papers 4865, Institute for the Study of Labor (IZA).
    3. Norbert Švarda, 2015. "The End of the Flat Tax Experiment in Slovakia," Discussion Papers 33, Central European Labour Studies Institute (CELSI).
    4. Olivier Bargain & Herwig Immervoll & Andreas Peichl & Sebastian Siegloch, 2012. "Distributional consequences of labor-demand shocks: the 2008–2009 recession in Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 118-138, February.
    5. Peichl, Andreas & Siegloch, Sebastian, 2012. "Accounting for labor demand effects in structural labor supply models," Labour Economics, Elsevier, vol. 19(1), pages 129-138.
    6. Mathias Dolls & Clemens Fuest & Dirk Neumann & Andreas Peichl, 2018. "An unemployment insurance scheme for the euro area? A comparison of different alternatives using microdata," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 273-309, February.
    7. Salvador Barrios & Mathias Dolls & Anamaria Maftei & Andreas Peichl & Sara Riscado & Janos Varga & Christian Wittneben, 2016. "Dynamic scoring of tax reforms in the European Union," JRC Working Papers on Taxation & Structural Reforms 2016-03, Joint Research Centre (Seville site).
    8. Eliane El Badaoui & Riccardo Magnani, 2015. "Tax Policies and Informality in South Africa," EconomiX Working Papers 2015-22, University of Paris Nanterre, EconomiX.
    9. Michal Horvath & Matus Senaj & Zuzana Siebertova & Norbert Svarda & Jana Valachyova, 2018. "Evaluating the Aggregate Effects of Tax and Benefit Reforms," Working Papers Working Paper No. 1/2018, Council for Budget Responsibility.
    10. Andreas Peichl, 2016. "Linking Microsimulation and CGE models," International Journal of Microsimulation, International Microsimulation Association, vol. 9(1), pages 167-174.
    11. Cristián Mardones P., 2014. "Complementarity between flat tax and conditional cash transfers to improve the income distribution in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 17(3), pages 04-27, December.
    12. Luciano Canova & Luca Piccoli & Amedeo Spadaro, 2015. "An ex ante evaluation of the Revenu de Solidarité Active by micro–macro simulation techniques," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-20, December.
    13. Loeffler, Max & Peichl, Andreas & Pestel, Nico & Siegloch, Sebastian & Sommer, Eric, 2014. "Documentation IZA?MOD v3.0: The IZA Policy Simulation Model," IZA Discussion Papers 8553, Institute for the Study of Labor (IZA).
    14. Olivier Bargain & Herwig Immervoll & Andreas Peichl & Sebastian Siegloch, 2011. "Distributional Consequences of Labor-demand Shocks: The 2008-09 Recession in Germany," CESifo Working Paper Series 3403, CESifo Group Munich.
    15. Benczur, Peter & Katay, Gabor & Kiss, Aron, 2017. "Assessing the Economic and Social Impact of Tax and Transfer System Reforms: A General Equilibrium Microsimulation Approach," Working Papers 2017-09, Joint Research Centre, European Commission (Ispra site).
    16. Péter Benczúr & Gábor Kátay & Áron Kiss, 2012. "Assessing changes of the Hungarian tax and transfer system: A general-equilibrium microsimulation approach," MNB Working Papers 2012/7, Magyar Nemzeti Bank (Central Bank of Hungary).
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    More about this item

    Keywords

    microsimulation; CGE; linked micro macro models; flat tax;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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