The Regressive Nature of Indirect Taxes: Lessons from a Micro-Simulation Model

Abstract

The the impact of several reforms of indirect taxation is evaluated by the use of a behavioral micro-simulation model. Price elasticities on the basis of a linearised quadratic demand system are estimated with specific prices, called personalized prices index. The laters allow a correct identification of the price parameters, using the information provided by the heterogeneous structure of household's spending. This framework associated with a complete modelisation of each fiscal mechanism on a broad range of goods allow the simulation of two measures, the first of which spaces out the VAT rates, while the second increases excise duties and reduces the rate of VAT. Each gives rise to a tax burden transfer of limited extent, which favours low-earners in the first instance and disadvantages them in the second. The relative similarity of the households consumption profiles between decile, but their wide variation within decile, lessen the redistributive effects.Indirect Taxation, Micro-simulation, Demand System, Personalized Prices Index