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Population ageing and fiscal sustainability: An integrated micro-macro analysis of required tax changes

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  • Rolf Aaberge

    ()

  • Ugo Colombino

    ()

  • Erling Holmøy

    ()

  • Birger Strøm
  • Tom Wennemo

Abstract

Most studies on the economic consequences of ageing rely on Computable General Equilibrium (CGE) models that account for feedback mechanisms through changes in relative prices, tax bases etc. However, since individual labour supply behaviour is considered to be a key element in CGEanalyses of fiscal sustainability problems, the results of these analyses may depend crucially on how the labour supply behaviour is modelled. The current practice of combining a simplified representation of the tax and transfer system with the labour supply behaviour of a few representative agents may render a misleading description of incentives and revenue effects. The purpose of this paper is to demonstrate the importance of using an alternative strategy by integrating a detailed microeconometric model of labour supply, that is sufficiently flexible to capture a large variety of labour supply responses, with a large-scale CGE model. The integrated micro-macro CGE model is employed to explore how endogenous household labour supply behaviour affects and interacts with sustainability problems in Norway. The empirical results suggest that the required increase in the future tax burden is less dramatic when the analysis allows for a flexible representation of the labour supply behaviour. Moreover, by replacing the current progressive tax system with a flat tax system it is found that the pressure on future public finances is significantly reduced.

Suggested Citation

  • Rolf Aaberge & Ugo Colombino & Erling Holmøy & Birger Strøm & Tom Wennemo, 2004. "Population ageing and fiscal sustainability: An integrated micro-macro analysis of required tax changes," CHILD Working Papers wp06_04, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  • Handle: RePEc:wpc:wplist:wp06_04
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    References listed on IDEAS

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    Cited by:

    1. François Bourguignon & Amedeo Spadaro, 2006. "Microsimulation as a tool for evaluating redistribution policies," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 4(1), pages 77-106, April.
    2. Bourguignon, François & Bussolo, Maurizio, 2013. "Income Distribution in Computable General Equilibrium Modeling," Handbook of Computable General Equilibrium Modeling, Elsevier.
    3. Stefan Boeters & Luc Savard, 2011. "The Labour Market in CGE Models," Cahiers de recherche 11-20, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
    4. Dorothée Boccanfuso & Bernard Decaluwé & Luc Savard, 2008. "Poverty, income distribution and CGE micro-simulation modeling: Does the functional form of distribution matter?," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 6(2), pages 149-184, June.
    5. Rob Euwals & Marike Knoef & Daniel Vuuren, 2011. "The trend in female labour force participation: what can be expected for the future?," Empirical Economics, Springer, vol. 40(3), pages 729-753, May.
    6. Boeters, Stefan, 2011. "Optimal tax progressivity in unionised labour markets: What are the driving forces?," Economic Modelling, Elsevier, vol. 28(5), pages 2282-2295, September.
    7. Arntz, Melanie & Boeters, Stefan & Gurtzgen, Nicole, 2006. "Alternative approaches to discrete working time choice in an AGE framework," Economic Modelling, Elsevier, vol. 23(6), pages 1008-1032, December.
    8. Luc Savard & Stéphane Mussard, 2005. "Micro-simulation and Multi-decomposition: A Case Study: Philippines," Cahiers de recherche 05-02, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
    9. Arntz, Melanie & Boeters, Stefan & Gürtzgen, Nicole & Schubert, Stefanie, 2008. "Analysing welfare reform in a microsimulation-AGE model: The value of disaggregation," Economic Modelling, Elsevier, vol. 25(3), pages 422-439, May.
    10. François Bourguignon & Amadéo Spadaro, 2005. "Microsimulation as a tool for evaluating redistribution policies," Working Papers halshs-00590863, HAL.
    11. Turid Åvitsland & Jørgen Aasness, 2004. "Combining CGE and microsimulation models: Effects on equality of VAT reforms," Discussion Papers 392, Statistics Norway, Research Department.
    12. repec:eee:hapoch:v1_713 is not listed on IDEAS
    13. Labandeira, Xavier & Labeaga, José M. & Rodríguez, Miguel, 2009. "An integrated economic and distributional analysis of energy policies," Energy Policy, Elsevier, vol. 37(12), pages 5776-5786, December.
    14. Wang, Xinxin & Chen, Kevin & Huang, Zuhui, 2013. "The Impact of China's Demographic Transition on Economic Growth and Income Distribution: CGE Modeling with Top-Down Micro-Simulation," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151276, Agricultural and Applied Economics Association.
    15. José M. Labeaga & Miguel Rodríguez & Xavier Labandeira, 2006. "A Macro and Microeconomic Integrated Approach to Assessing the Effects of Public Policies," Working Papers 2006-02, FEDEA.
    16. Melanie Arntz & Stefan Boeters & Nicole Gürtzgen & Stefanie Schubert, 2006. "Analysing Welfare Reform in a Microsimulation-AGE Model," Computing in Economics and Finance 2006 109, Society for Computational Economics.
    17. Rolf Aaberge & Ugo Colombino, 2005. "A microeconometric model for analysing efficiency and distributional effects of tax reforms: a review of results for Italy and Norwayƒx," Public Economics 0501002, University Library of Munich, Germany.
    18. Boeters, Stefan & Savard, Luc, 2013. "The Labor Market in Computable General Equilibrium Models," Handbook of Computable General Equilibrium Modeling, Elsevier.
    19. Turid Avitsland & Jorgen Aasness, 2006. "Combining microsimulation and CGE models: Effects on equality of VAT reforms," Computing in Economics and Finance 2006 132, Society for Computational Economics.

    More about this item

    Keywords

    Population Ageing; Fiscal Sustainability; Labour Supply; Computable General; Equilibrium;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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