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A shaft of light into the black box of CGE analyses of tax reforms

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  • Fæhn, Taran

Abstract

While computable general equilibrium (CGE) analysis is a useful and widely applied method for studying tax policies, there is a challenge to present and substantiate the results. I present two analytical tools designed for this purpose. The first is a two-dimensional, diagrammatical exposition of the general equilibrium solutions of a large-scale model, reduced into a two-equation system. The second is a miniature representation of the large-scale model, which can sort out the main general equilibrium responses of the CGE model. By reducing the miniature model into the same two equations, the two devices can be combined to shed light into the black box of the model. I demonstrate how the devices can be utilised to provide economic intuition on welfare and unemployment effects of changes in taxation, exemplified by CO2 taxes, VAT and payroll tax.

Suggested Citation

  • Fæhn, Taran, 2015. "A shaft of light into the black box of CGE analyses of tax reforms," Economic Modelling, Elsevier, vol. 49(C), pages 320-330.
    • Handle: RePEc:eee:ecmode:v:49:y:2015:i:c:p:320-330
    DOI: 10.1016/j.econmod.2015.05.003
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