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A recursive algorithm to generate piecewise linear budget contraints

Author

Listed:
  • Alan Duncan

    (Institute for Fiscal Studies and Curtin Business School)

  • Graham Stark

    (Institute for Fiscal Studies)

Abstract

This paper introduces a recursive algorithm with which to generate complete and accurate budget constraints using static microsimulation models. We describe the generic algorithm and discuss and extension by which reasons for any change in the marginal effective tax rate may be explained. We derive continuous expressions for average tax rate (ATR), average marginal tax rate (AMTR), replacement rate (RR) and marginal effective tax rate (METR) schedules, expressed solely in terms of the marginal wage rate and 'virtual' income. A practical application serves to highlight the usefulness of this algorithm in fiscal policy analysis at micro level.

Suggested Citation

  • Alan Duncan & Graham Stark, 2000. "A recursive algorithm to generate piecewise linear budget contraints," IFS Working Papers W00/11, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:00/11
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    File URL: http://www.ifs.org.uk/wps/wp0011.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. John Creedy & Guyonne Kalb & Hsein Kew, 2001. "The Melbourne Institute Tax and Transfer Simulator (MITTS)," Melbourne Institute Working Paper Series wp2001n16, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
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    Cited by:

    1. Alan Duncan & Mark N. Harris, 2002. "Simulating the Behavioural Effects of Welfare Reforms Among Sole Parents in Australia," The Economic Record, The Economic Society of Australia, vol. 78(242), pages 264-276, September.
    2. Rolf Aaberge & Ugo Colombino, 2014. "Labour Supply Models," Contributions to Economic Analysis, in: Handbook of Microsimulation Modelling, volume 127, pages 167-221, Emerald Group Publishing Limited.

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