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Microsimulation of indirect taxes


  • André Decoster

    (University of Leuven.)

  • Jason Loughrey

    (Rural Economy Research Centre, Teagasc)

  • Cathal O'Donoghue

    (Rural Economy Research Centre, Teagasc)

  • Dirk Verwerft

    (University of Leuven.)


The goal of this paper is to simulate a tax shift from labour to consumption and perform a distributional analysis of the reform. Microsimulation programs are often uniquely focussed on the personal income tax system and on social security contributions and benefits. However, against a political background where income taxes are under increased pressure and alternative, less distortive forms of taxation come under consideration, microsimulation models enriched with expenditure data and consumption tax structures could play an important role in sharpening the (distributional) picture of such systemic changes. The current paper discusses an algorithm for this enrichment - mainly with VAT, excises and other consumption taxes - within the context of the EUROMOD-framework and applies the obtained program to the simulation of a decrease of social security contributions compensated by a rise in standard VAT rate to maintain government budget neutrality for four EU countries. The measure is found to have a (first order) regressive effect, pointing to the fact that keeping redistribution constant would require the remaining post-reform income taxation to become more progressive.

Suggested Citation

  • André Decoster & Jason Loughrey & Cathal O'Donoghue & Dirk Verwerft, 2011. "Microsimulation of indirect taxes," International Journal of Microsimulation, International Microsimulation Association, vol. 4(2), pages 41-56.
  • Handle: RePEc:ijm:journl:v:4:y:2011:i:2:p:41-56

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    References listed on IDEAS

    1. Poterba, James M, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," American Economic Review, American Economic Association, vol. 79(2), pages 325-330, May.
    2. Ahmad, Ehtisham & Stern, Nicholas, 1984. "The theory of reform and indian indirect taxes," Journal of Public Economics, Elsevier, vol. 25(3), pages 259-298, December.
    3. Fullerton, Don & Rogers, Diane Lim, 1991. "Lifetime Versus Annual Perspectives on Tax Incidence," National Tax Journal, National Tax Association, vol. 44(3), pages 277-87, September.
    4. Alan J. Auerbach, 2006. "The Choice Between Income and Consumption Taxes: A Primer," NBER Working Papers 12307, National Bureau of Economic Research, Inc.
    5. Cathal O'Donoghue & Massimo Baldini, 2004. "Modelling the Redistributive Impact of Indirect Taxes in Europe: An Application of EUROMOD," Working Papers 0077, National University of Ireland Galway, Department of Economics, revised 2004.
    6. Richard Blundell & Ian Preston, 1998. "Consumption Inequality and Income Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 603-640.
    7. Fullerton, Don & Rogers, Diane Lim, 1991. "Lifetime Versus Annual Perspectives on Tax Incidence," National Tax Journal, National Tax Association, vol. 44(3), pages 277-287, September.
    8. Decoster, Andre & Schokkaert, Erik & Van Camp, Guy, 1997. "Is redistribution through indirect taxes equitable?," European Economic Review, Elsevier, vol. 41(3-5), pages 599-608, April.
    9. King, Mervyn A., 1983. "Welfare analysis of tax reforms using household data," Journal of Public Economics, Elsevier, vol. 21(2), pages 183-214, July.
    10. Richard Arnott & Bruce Greenwald & Ravi Kanbur & Barry Nalebuff (ed.), 2003. "Economics for an Imperfect World: Essays in Honor of Joseph E. Stiglitz," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012057, January.
    11. Sutherland, Holly & Immervoll, Herwig & O'Donoghue, Cathal, 1999. "An introduction to EUROMOD," EUROMOD Working Papers EM0/99, EUROMOD at the Institute for Social and Economic Research.
    12. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    13. Willem Adema & Maxime Ladaique, 2005. "Net Social Expenditure, 2005 Edition: More Comprehensive Measures of Social Support," OECD Social, Employment and Migration Working Papers 29, OECD Publishing.
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    Cited by:

    1. Lars-H. R. Siemers, 2014. "A General Microsimulation Model for the EU VAT with a specific Application to Germany," International Journal of Microsimulation, International Microsimulation Association, vol. 7(2), pages 40-93.
    2. Campoy-Muñoz, Pilar & Cardenete Flores, Manuel Alejandro & Delgado, M. Carmen & Hewings, Geoffrey, 2016. "Effects of a reduction in employers' social security contributions: Evidence from Spain," Economics Discussion Papers 2016-32, Kiel Institute for the World Economy (IfW).
    3. Figari, Francesco & Paulus, Alari & Sutherland, Holly, 2014. "Microsimulation and policy analysis," ISER Working Paper Series 2014-23, Institute for Social and Economic Research.
    4. repec:ijm:journl:v10:y:2017:i:1:p:39-72 is not listed on IDEAS
    5. Oguzhan Akgun & Boris Cournède & Jean-Marc Fournier, 2017. "The effects of the tax mix on inequality and growth," OECD Economics Department Working Papers 1447, OECD Publishing.
    6. Massimo Baldini & Daniele Pacifico & Federica Termini, 2015. "Imputation of missing expenditure information in standard household income surveys," Department of Economics 0049, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    7. Massimo Baldini & Daniele Pacifico & Federica Termini, 2015. "Imputation of missing expenditure information in standard household income surveys," Center for the Analysis of Public Policies (CAPP) 0116, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    8. repec:kap:jecinq:v:15:y:2017:i:4:d:10.1007_s10888-017-9369-3 is not listed on IDEAS
    9. Andrea Taddei, 2012. "The tax shift from labor to consumption in Italy: a fiscal microsimulation analysis using EUROMOD," DEP - series of economic working papers 9/2012, University of Genoa, Research Doctorate in Public Economics.

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