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@article{ Colombino2022, title = {Combining Microsimulation and Numerical Maximization to Identify Optimal Tax-Transfer Rules}, author = {Colombino, U. and Islam, N.}, journal = {International Journal of Microsimulation}, number = {2}, pages = {4-43}, volume = {15}, year = {2022}, issn = {1747-5864}, doi = {https://doi.org/10.34196/ijm.00261}, urn = {https://nbn-resolving.org/urn:nbn:de:0168-ssoar-92691-4}, 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 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).}, keywords = {Besteuerung; taxation; Wohlfahrt; welfare; Effizienz; efficiency; Gleichheit; equality; Simulation; simulation; Arbeitskräfteangebot; available workers; Bundesrepublik Deutschland; Federal Republic of Germany; Frankreich; France; Italien; Italy; Luxemburg; Luxembourg; Spanien; Spain; Großbritannien; Great Britain}}