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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.
Bibliographical noteThis is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy.
- dynamic general equilibrium
- labour supply elasticity
- tax reform
- flat tax
Michal Horvath (Presenter)5 Dec 2018
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