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A Microsimulation Approach to an Optimal Swedish Income Tax

  • Peter Ericson

    ()

    (Empirica, Högbergsgatan 50, SE 118 26 Stockholm, Sweden)

  • Lennart Flood

    (School of Business, Economics and Law, University of Gothenburg, Department of Economics)

The purpose of this paper is to identify a Swedish tax/benefit design that maximizes social welfare. A two stage process is proposed where individuals’ preferred choice of leisure and consumption is solved in the first stage, and the second stage identifies the tax/benefit system that maximizes the social welfare function. The study deviates from the mainstream literature as the first stage is based on a micro simulation model with estimated behavioural responses. We estimate a structural model for a sample of workers or voluntary non-workers that describes heterogeneity in consumption-leisure preferences for different household types. Models that describe the participation decision for the unemployed as well as individuals outside the labour force are also included. The results suggest that increased housing allowance, basic deduction, and in-work tax credit in combination with a reduction of the progressive national taxes would increase welfare.

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Article provided by International Microsimulation Association in its journal International Journal of Microsimulation.

Volume (Year): 2 (2012)
Issue (Month): 5 ()
Pages: 2-21

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Handle: RePEc:ijm:journl:v:5:y:2012:i:2:p:2-21
Contact details of provider: Web page: http://www.microsimulation.org/ijm/

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  1. Ericson, Peter & Flood, Lennart & Wahlberg, Roger, 2009. "SWEtaxben: A Swedish Tax/benefit Micro Simulation Model and an Evaluation of a Swedish Tax Reform," Working Papers in Economics 346, University of Gothenburg, Department of Economics.
  2. Frederic Vermeulen, 2000. "Collective household models: principles and main results," Public Economics Working Paper Series ces0028, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics.
  3. Richard Blundell & Andrew Shephard, 2011. "Employment, Hours of Work and the Optimal Taxation of Low Income Families," Working Papers 1307, Princeton University, Department of Economics, Center for Economic Policy Studies..
  4. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
  5. Lennart Flood & Jörgen Hansen & Roger Wahlberg, 2004. "Household Labor Supply and Welfare Participation in Sweden," Journal of Human Resources, University of Wisconsin Press, vol. 39(4).
  6. Jeffrey M Wooldridge, 2002. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," CeMMAP working papers CWP18/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  7. Arthur van Soest, 1995. "Structural Models of Family Labor Supply: A Discrete Choice Approach," Journal of Human Resources, University of Wisconsin Press, vol. 30(1), pages 63-88.
  8. Flood, Lennart & Pylkkänen, Elina & Wahlberg, Roger, 2003. "From Welfare to Work: Evaluating a Proposed Tax and Benefit Reform Targeted at Single Mothers in Sweden," Working Papers in Economics 107, University of Gothenburg, Department of Economics.
  9. Slemrod, Joel, 1990. "Optimal Taxation and Optimal Tax Systems," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 157-78, Winter.
  10. François Bourguignon & Amadéo Spadaro, 2005. "Microsimulation as a tool for evaluating redistribution policies," PSE Working Papers halshs-00590863, HAL.
  11. Rolf Aaberge, 2000. "Characterizations of Lorenz curves and income distributions," Social Choice and Welfare, Springer, vol. 17(4), pages 639-653.
  12. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
  13. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
  14. Aaberge, Rolf & Flood, Lennart, 2008. "Evaluation of an In-Work Tax Credit Reform in Sweden: Effects on Labor Supply and Welfare Participation of Single Mothers," IZA Discussion Papers 3736, Institute for the Study of Labor (IZA).
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