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Discrete choice models of labour Supply, behavioural microsimulation and the Spanish tax reforms

  • José M. Labeaga, Xisco Oliver
  • Xisco Oliver
  • Amedeo Spadaro

In this paper, we demonstrate the potential of behavioural microsimulation models as powerful tools for the ex ante evaluation of public policies. The subject of our analysis is the impact of recent Spanish Income Tax reforms on efficiency and household and social welfare. We also analyze the likely effects of some basic income flat tax and vital minimum flat tax schemes. The analysis is carried out using a microsimulation model in which labour supply is explicitly taken into account. Instead of following the traditional continuous approach (Hausman 1981, 1985a, and 1985b), we estimate the direct utility function using the methodology proposed by Van Soest (1995). Our data come from a sample of Spanish individuals in the 1995 wave of the EC Household Panel. We show that in the Spanish case, the redistribution policies considered have only little impact on the efficiency of the economy. On the contrary, they strongly affect social welfare.

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Paper provided by FEDEA in its series Working Papers with number 2005-14.

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Handle: RePEc:fda:fdaddt:2005-14
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  1. Hausman, Jerry A, 1985. "The Econometrics of Nonlinear Budget Sets," Econometrica, Econometric Society, vol. 53(6), pages 1255-82, November.
  2. François Bourguignon & Amedeo Spadaro, 2006. "Microsimulation as a tool for evaluating redistribution policies," Journal of Economic Inequality, Springer, vol. 4(1), pages 77-106, April.
  3. Ugo Colombino & Rolf Aaberge & Tom Wennemo, 2005. "Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply," Econometrics 0510001, EconWPA.
  4. José Labeaga & Xisco Oliver & Amedeo Spadaro, 2008. "Discrete choice models of labour supply, behavioural microsimulation and the Spanish tax reforms," Journal of Economic Inequality, Springer, vol. 6(3), pages 247-273, September.
  5. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March.
  6. Michael P. Keane & Robert Moffitt, 1995. "A structural model of multiple welfare program participation and labor supply," Working Papers 557, Federal Reserve Bank of Minneapolis.
  7. Rolf Aaberge & Ugo Colombino & Steinar Strøm, 1996. "Welfare Effects of Proportional Taxation: Empirical Evidence from Italy, Norway and Sweden," Discussion Papers 171, Research Department of Statistics Norway.
  8. John Creedy & Guyonne Kalb & Hsein Kew, 2003. "Flattening the Effective Marginal Tax Rate Structure in Australia: Policy Simulations Using the Melbourne Institute Tax and Transfer Simulator," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(2), pages 156-172.
  9. François Bourguignon & Amadéo Spadaro, 2005. "Microsimulation as a tool for evaluating redistribution policies," PSE Working Papers halshs-00590863, HAL.
  10. Blundell, Richard & Ham, John & Meghir, Costas, 1987. "Unemployment and Female Labour Supply," Economic Journal, Royal Economic Society, vol. 97(388a), pages 44-64, Supplemen.
  11. King, Mervyn A., 1983. "Welfare analysis of tax reforms using household data," Journal of Public Economics, Elsevier, vol. 21(2), pages 183-214, July.
  12. MaCurdy, Thomas, 1992. "Work Disincentive Effects of Taxes: A Reexamination of Some Evidence," American Economic Review, American Economic Association, vol. 82(2), pages 243-49, May.
  13. Stern, N. H., 1976. "On the specification of models of optimum income taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 123-162.
  14. Aaberge, Rolf & Colombino, Ugo & Strøm, Steinar, 2003. "Do More Equal Slices Shrink the Cake? An Empirical Investigation of Tax-Transfer Reform Proposals in Italy," Memorandum 37/2003, Oslo University, Department of Economics.
  15. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  16. E. Paul Durrenberger, 2005. "Labour," Chapters, in: A Handbook of Economic Anthropology, chapter 8 Edward Elgar.
  17. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  18. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
  19. Bingley, Paul & Walker, Ian, 1997. "The Labour Supply, Unemployment and Participation of Lone Mothers in In-Work Transfer Programmes," Economic Journal, Royal Economic Society, vol. 107(444), pages 1375-90, September.
  20. Arellano, M. & Bover, O. & Labeaga, J.M., 1997. "Autoregressive Models with Sample Selectivity for Panel Data," Papers 9706, Centro de Estudios Monetarios Y Financieros-.
  21. Álvarez García Santiago & Prieto Rodríguez Juan, 2002. "La reforma del IRPF y los determinantes de la oferta laboral en la familia española," Working Papers 201082, Fundacion BBVA / BBVA Foundation.
  22. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  23. Hoynes, Hilary Williamson, 1996. "Welfare Transfers in Two-Parent Families: Labor Supply and Welfare Participation under AFDC-UP," Econometrica, Econometric Society, vol. 64(2), pages 295-332, March.
  24. Guyonne Kalb & Hsein Kew & Rosanna Scutella, 2005. "Effects of the Australian New Tax System on Income Tax and Benefits with and without Labour Supply Responses," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 38(2), pages 137-158, 06.
  25. Bonin, Holger & Kempe, Wolfram & Schneider, Hilmar, 2002. "Household Labor Supply Effects of Low-Wage Subsidies in Germany," IZA Discussion Papers 637, Institute for the Study of Labor (IZA).
  26. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
  27. repec:dgr:kubcen:200020 is not listed on IDEAS
  28. Creedy, John & Duncan, Alan, 2002. " Behavioural Microsimulation with Labour Supply Responses," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 1-39, February.
  29. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 635-59, December.
  30. Gerald Auten & Robert Carroll, 1999. "The Effect Of Income Taxes On Household Income," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 681-693, November.
  31. Kajal Lahiri, 2005. "Analysis of Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 1093-1095.
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