Piecemeal Modeling of the Effects of Joint Direct and Indirect Tax Reforms

Author:

Capéau Bart12ORCID,Decoster André2ORCID,Van Houtven Stijn2ORCID

Affiliation:

1. European Center for Advanced Research in Economics and Statistics (ECARES), Université Libre de Bruxelles, Bruxelles, Belgium

2. Department of Economics, KU Leuven, Leuven, Belgium

Abstract

In this article, we elicit the assumptions needed for an assessment of a joint reform of personal income and indirect taxes in a consistent conceptual framework. One often lacks an encompassing model for both labor supply decisions in real world tax and benefit contexts and the allocation of disposable income to commodities. We characterize households’ labor supply decisions by a random utility random opportunity model of job choice. We illustrate the framework with a Belgian tax reform proposal that shifts the burden away from labor taxes to indirect taxation. We find substantial empirical evidence that, both from a distributional and from a budgetary perspective, it is important to account for the impact of indirect taxes on the labor supply decision of households. The cost recovery effects of the tax shift are negative. This is, among other things, explained by the income effect in our job choice model.

Funder

National Bank of Belgium

Joint Research Centre Sevilla

Belgian Federal Science Policy Office

Fonds Wetenschappelijk Onderzoek

Publisher

SAGE Publications

Subject

Public Administration,Economics and Econometrics,Finance

Reference45 articles.

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4. Akoğuz Elif C., Capéau Bart, Decoster André, De Sadeleer Liebrecht, Güner Duygu, Manios Kostas, Paulus Alari, Vanheukelom Toon. 2020. A new indirect tax tool for EUROMOD. Final Report JRC Project no. JRC/SVQ/2018/B.2/0021/OC.

5. Simulating Fundamental Tax Reform in the United States

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