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Evaluating tax reforms without utility measures: the performance of revenue potentialities

Listed author(s):
  • Fabrizio Bulckaen
  • Alberto Pench
  • Marco Stampini

The desirability of revenue-neutral commodity tax reforms is traditionally evaluated by comparing the marginal cost of public funds (MCF) raised through different taxes. In simple theoretical models, however, it is possible to rely on more simple indicators, which do not imply a measure of consumer utility (Hatta (1986), Slemrod and Yitzhaki (1996), Bulckaen and Stampini (2001)). Unfortunately, the extension of such appealing policy rules to more complex economic frameworks is not straightforward and has not been assessed so far. We attempt to fill this gap and analyze the reliability of decisions based on revenue potentialities - defined as ratio between marginal revenue and tax base - through simulations within a numerical model of the Italian economy. Six hundred commodity tax reforms are simulated, with very encouraging results: forecasts based on the comparison of revenue potentialities are correct in 83 percent of cases simulated. Furthermore, forecast precision increases to 100 percent when revenue potentialities are sufficiently differentiated. Overall, the paper shows that revenue potentialities are reliable indicators for policy making.

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Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2003/7.

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Date of creation: 01 Jan 2003
Handle: RePEc:pie:dsedps:2003/7
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