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Analysing tax-benefit reforms with nonparametric methods

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  • Carlo Vittorio FIORIO

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Abstract

Static tax-benefit microsimulation models (MSM) are widely used and reputed tools for public policy analysis but a more than careful use of them is compelling. This paper focuses on the analysis of MSM output, suggesting to use nonparametric kernel methods rather than most often used histograms for the analysis of income distributions, and nonparametric regressions in place of histograms by income deciles for identifying gainers and losers. Although slightly less intuitive, nonparametric methods are robust and can be easily tested. A robust and testable analysis of MSM output is crucial as MSM are often used also for tax-benefit policy design. A MSM is used for the analysis of 1998 Italian personal income tax reform. Although not a radical reform, nonparametric methods allowed for detection of the role of the tax system for the emergence of bimodality of disposable income distribution, dramatically different impact depending on some family types, differential impact of losses and gains at different levels of income, and a more robust understanding of the main components of the reform.

Suggested Citation

  • Carlo Vittorio FIORIO, 2008. "Analysing tax-benefit reforms with nonparametric methods," Departmental Working Papers 2008-27, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  • Handle: RePEc:mil:wpdepa:2008-27
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    File URL: http://wp.demm.unimi.it/files/wp/2008/DEMM-2008_027wp.pdf
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    References listed on IDEAS

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    1. DiNardo, John & Fortin, Nicole M & Lemieux, Thomas, 1996. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," Econometrica, Econometric Society, vol. 64(5), pages 1001-1044, September.
    2. Quah, Danny, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," CEPR Discussion Papers 1586, C.E.P.R. Discussion Papers.
    3. Quah, Danny T, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," Journal of Economic Growth, Springer, vol. 2(1), pages 27-59, March.
    4. Pudney, Stephen, 1993. "Income and Wealth Inequality and the Life Cycle: A Non-parametric Analysis for China," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 249-276, July-Sept.
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    More about this item

    Keywords

    Tax-benefit microsimulation model; tax reform; nonparametric regression; kernel density on bounded support;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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