The Benefits and Problems of Linking Micro and Macro Models: Evidence from a Flat Tax Analysis

Microsimulation (MS) and Computable General Equilibrium models (CGE) have both been widely used in policy analysis. Their combination allows the utilisation of the advantages of both types. The aim of this paper is to describe the state-of-the-art in simulation analysis and to illustrate the benefits and problems of linking micro and macro models by analysing flat tax reform proposals for Germany. Taking feedback effects into account has important implications for the evaluation of tax reforms. The analysis shows that a personal income flat tax can indeed overcome the fundamental equity efficiency trade-off while simultaneously increasing the tax revenue. However, this result does not hold for a flat tax combining a personal income flat tax with a corporate cash flow flat tax, even when allowing for an ex-post loss in revenue as the top of the distribution still gains the most.Microsimulation, CGE, linked micro macro models, flat tax

The benefits of linking CGE and Microsimulation Models - Evidence from a Flat Tax analysis

Mircrosimulation models (MSM) and Computable General Equilibrium models (CGE) have both been widely used in policy analysis. The combination of these two model types allows the utilisation of the advantages of both types. The aim of this paper is to describe the state-of-the-art in simulation and to demonstrate the benefits of linking both model types modelling flat tax reform proposals for Germany. Taking the general equilibrium effects into account has important implications for the evaluation of a tax reform. The analysis shows that a personal income flat tax can indeed overcome the fundamental equity efficiency trade-off in the long-run while simultaneously increasing the tax revenue. However, this result does not hold for a flat tax combining a personal income flat tax with a corporate cash flow flat tax, even when allowing for an ex-post loss in revenue. --Microsimulation,CGE,linked micro macro models,flat tax

The Benefits of Linking CGE and Microsimulation Models: Evidence from a Flat Tax Analysis

Mircrosimulation models (MSM) and Computable General Equilibrium models (CGE) have both been widely used in policy analysis. The combination of these two model types allows the utilisation of the advantages of both types. The aim of this paper is to describe the state-of-the-art in simulation and to demonstrate the benefits of linking both model types modelling flat tax reform proposals for Germany. Taking the general equilibrium effects into account has important implications for the evaluation of a tax reform. The analysis shows that a personal income flat tax can indeed overcome the fundamental equity efficiency trade-off in the long-run while simultaneously increasing the tax revenue. However, this result does not hold for a flat tax combining a personal income flat tax with a corporate cash flow flat tax, even when allowing for an ex-post loss in revenue.microsimulation, CGE, linked micro macro models, flat tax

Progressive Taxation and Tax Morale

As the link between tax compliance and tax morale is found to be robust, finding the determinants of tax morale can help to understand and fight tax evasion. In this paper we analyze the effect of progressive taxation on tax morale in a cross-country approach – which has not been investigated before. Our theoretical analysis leads to two testable predictions. First, an individual’s tax morale is higher, the more progressive the tax schedule is. Second, the impact of tax progressivity on tax morale is declining in income. In our empirical analysis, we make use of a unique dataset of tax progressivity measures and follow most of the tax morale literature by employing the World Values Survey to measure tax morale. Controlling for a wide range of variables, we confirm both hypotheses in our empirical analysis.tax morale, tax compliance, progressivity, taxation, redistribution

Documentation FiFoSiM: Integrated tax benefit microsimulation

This paper describes FiFoSiM, the integrated tax benefit microsimulation and CGE model of the Center of Public Economics at the University of Cologne. FiFoSiM consists of three main parts. The first part is a static tax benefit microsimulation module. The second part adds a behavioural component to the model: an econometrically estimated labour supply model. The third module is a CGE model which allows the user of FiFoSiM to assess the global economic effects of policy measures. Two specific features distinguish FiFoSiM from other tax benefit models: First, the simultaneous use of two databases for the tax benefit module and second, the linkage of the tax benefit model to a CGE model. --FiFoSiM,microsimulation,CGE

Progressive Taxation and Tax Morale

As the link between tax compliance and tax morale is found to be robust, finding the determinants of tax morale can help to understand and fight tax evasion. In this paper we analyze the effect of progressive taxation on tax morale in a cross-country approach - which has not been investigated before. Our theoretical analysis leads to two testable predictions. First, an individual's tax morale is higher, the more progressive the tax schedule is. Second, the impact of tax progressivity on tax morale is declining in income. In our empirical analysis, we make use of a unique dataset of tax progressivity measures and follow most of the tax morale literature by employing the World Values Survey to measure tax morale. Controlling for a wide range of variables, we confirm both hypotheses in our empirical analysis.Tax Morale, Tax Compliance, Progressivity, Taxation, Redistribution

Multidimensional affluence: Theory and applications to Germany and the US

This paper suggests multidimensional affluence measures for the top of the distribution. In contrast to commonly used top income shares, they allow the analysis of the extent, intensity and breadth of affluence in several dimensions within a common framework. We illustrate this by analyzing the role of income and wealth as dimensions of multidimensional well-being in Germany and the US in 2007 as well as for the US over the period 1989–2007. We find distinct country differences with the country ranking depending on the measure. While in Germany wealth predominantly contributes to the intensity of affluence, income is more important in the US.top incomes, multidimensional measurement, richness, wealth, inequality

The Development of Multidimensional Poverty in Germany 1985-2007

This paper deals with concepts of multidimensional poverty measurement and applies them to Germany. Three concepts of poverty are examined and included into one multidimensional approach: economic well being, capability and social exclusion. The empirical application relies on indices introduced by Bourguigon and Chakravarty (2003), and Alkire and Foster (2008). It uses data from the German Socio-Economic Panel study. The indices are tested for their robustness in several aspects, and the influence of changing levels of substitutability between achievements on the poverty dimensions is examined. It transpires that the depth of poverty is relatively stable for the period 1985 to 2007. A structural analysis of the poor in 2007 reveals that the group at greatest risk of poverty is the unemployed.multidimensional measurement, poverty, deprivation, inequality

Effects of flat tax reforms in Western Europe on equity and efficiency

The flat income tax has become increasingly popular recently, yet its implementation is limited to Eastern Europe. We analyse the distributional and e? ciency effects of flat tax scenarios for Western European countries. Our simulations show that flat tax rates required to attain revenue neutrality with existing basic allowances improve labour supply incentives. However, they result in higher inequality and polarisation. Flat rates necessary to keep the inequality levels unchanged allow for some scope for flat taxes to increase both equity and e? ciency. Our analysis suggests that Mediterranean countries are more likely to benefit from flat taxes. --Flat tax reform,income distribution,work incentives,microsimulation

Multidimensional Well-Being at the Top: Evidence for Germany

This paper employs a multidimensional approach for the measurement of well-being at the top of the distribution using German SOEP micro data. Besides income as traditional indicator for material well-being, we include health as a proxy for nonmaterial quality of life as well as self-reported satisfaction with life as dimensions. We find that one third of the German population is well-off in at least one dimension but only one percent in all three dimensions simultaneously. While the distribution of income has become more concentrated at the top, the concentration at the top of the multidimensional well-being distribution has decreased over time. Moreover, health as well as life satisfaction contribute quite substantially to multidimensional wellbeing at the top which has important policy implications.multidimensional measurement, well-being, Germany