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Combining Microsimulation and Numerical Maximization to Identify Optimal Tax-Transfer Rules
[journal article]
Abstract In this paper we propose a computational approach to empirical optimal taxation. We develop and estimate a microeconometric model that is run to simulate household labour supply decisions and the implied economic, fiscal and welfare effects. The microsimulation is embedded into a numerical optimizat... view more
In this paper we propose a computational approach to empirical optimal taxation. We develop and estimate a microeconometric model that is run to simulate household labour supply decisions and the implied economic, fiscal and welfare effects. The microsimulation is embedded into a numerical optimization routine that identifies the tax-transfer rule that maximizes a social welfare function. We consider the class of tax-transfer rules where net available income is computed as a 4th degree polynomial transformation of taxable income plus a transfer. We present the results for six European countries: Germany, France, Italy, Luxembourg, Spain and the United Kingdom. For most values of the inequality aversion parameter k that characterizes the social welfare function, the optimized rules provide a higher social welfare than the current rule, with the exception of Luxembourg. The optimized tax-transfer rules are close to a Flat Tax plus a Universal Basic Income (or equivalently a Negative Income Tax).... view less
Keywords
taxation; welfare; efficiency; equality; simulation; available workers; Federal Republic of Germany; France; Italy; Luxembourg; Spain; Great Britain
Classification
Public Finance
Methods and Techniques of Data Collection and Data Analysis, Statistical Methods, Computer Methods
Free Keywords
optimal tax-transfer systems; behavioural microsimulation; EU-SILC 2015
Document language
English
Publication Year
2022
Page/Pages
p. 4-43
Journal
International Journal of Microsimulation, 15 (2022) 2
DOI
https://doi.org/10.34196/ijm.00261
ISSN
1747-5864
Status
Published Version; peer reviewed