The end of the flat tax experiment in Slovakia: An evaluation using behavioural microsimulation in a dynamic macroeconomic framework

TY - JOUR

T1 - The end of the flat tax experiment in Slovakia

T2 - An evaluation using behavioural microsimulation in a dynamic macroeconomic framework

AU - Horvath, Michal

AU - Siebertova, Zuzana

AU - Senaj, Matus

AU - Svarda, Norbert

AU - Valachyova, Jana

N1 - This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy.

PY - 2019/8

Y1 - 2019/8

N2 - The paper introduces a new way of linking microsimulation models with dynamic general equilibrium frameworks to obtain an evaluation of the impact of detailed tax and benefit measures on the aggregate economy. In the approach presented in this paper, income heterogeneity interacts with the macro-economy via aggregated individual labour supply decisions which influence, and are influenced by, the dynamic evolution of the real wage rate. The method involves a reduced-form representation of the information flow between the macroeconomic and microeconomic blocks. The practical usefulness of the approach is demonstrated by evaluating actual and hypothetical tax reforms that involve abandoning the flat tax system in Slovakia. A hypothetical move to a highly progressive tax structure is shown to generate some employment gains but is associated with a drop in aggregate income and tax revenue.

AB - The paper introduces a new way of linking microsimulation models with dynamic general equilibrium frameworks to obtain an evaluation of the impact of detailed tax and benefit measures on the aggregate economy. In the approach presented in this paper, income heterogeneity interacts with the macro-economy via aggregated individual labour supply decisions which influence, and are influenced by, the dynamic evolution of the real wage rate. The method involves a reduced-form representation of the information flow between the macroeconomic and microeconomic blocks. The practical usefulness of the approach is demonstrated by evaluating actual and hypothetical tax reforms that involve abandoning the flat tax system in Slovakia. A hypothetical move to a highly progressive tax structure is shown to generate some employment gains but is associated with a drop in aggregate income and tax revenue.

KW - microsimulation

KW - dynamic general equilibrium

KW - unemployment

KW - labour supply elasticity

KW - tax reform

KW - flat tax

U2 - 10.1016/j.econmod.2018.11.005

DO - 10.1016/j.econmod.2018.11.005

M3 - Article

VL - 80

SP - 171

EP - 184

JO - Economic Modelling

JF - Economic Modelling

ER -