Behavioral Simulation Methods in Tax Policy Analysis by Martin Feldstein

By Martin Feldstein

Those 13 papers and accompanying commentaries are the 1st culmination of an ongoing examine venture that has targeting constructing simulation types that contain the behavioral responses of people and companies to replacement tax ideas and premiums and on increasing computational basic equilibrium versions that examine the long-run results of alterations at the economic system as a whole.The imperative concentration of the undertaking has been at the microsimulation of person habit. hence, this quantity comprises stories of person responses to an over relief in tax premiums and to adjustments within the optimum tax premiums; a learn of other tax remedies of the kin; and reports of such particular facets of loved ones habit as tax therapy of domestic possession, charitable contributions, and person saving habit. Microsimulation strategies also are used to estimate the results of other guidelines at the long-run monetary prestige of the social protection application and to check the consequences of other tax ideas on company funding and of foreign-source source of revenue on in a foreign country investment.The papers dedicated to the improvement of normal equilibrium simulation types to incorporate an exam of the results of foreign alternate and capital flows, a research of the results of capital taxation that makes use of a closed financial system equilibrium version, and an exam of the impact of switching to an inflation-indexed tax process. within the volume's ultimate paper, a life-cycle version during which contributors maximize lifetime application topic to an entire life funds constraint is used to simulate the results of tax ideas on own mark downs.

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5) that relates hours of work to exogenous variables and the tax code. The framework used is the stan- 19 Alternative Tax Treatments of the Family Income ’ MI I I I N ! T P d Leisure Fig. I6 The theory views the hours-of-work decision as an outcome when the individual maximizes a utility function subject to a budget constraint. 2 we explain how preferences are modeled. 1 The Budget Constraint Consider first the budget constraint faced by an untaxed individual with a wage w and unearned income I.

11. ,= c+ Ul! 12. Aggregate over i’s. To assume no response by husbands (step 1) seems to me to be defensible in an initial analysis of the problem. But given the relatively small behavioral impact on the simulation results, I am not confident that the effect of husbands’ behavioral responses could ultimately be treated as a small part of the total. The income maintenance experiments, for example, identified a significant labor supply response by heads of families to changes in tax codes, especially changes in unearned income (to which the authors’ results are not directed).

Feenberg/Harvey S. Rosen 1. What about the labor supply response of husbands? We have assumed that the labor supply of husbands is perfectly inelastic. 3, this assumption is broadly consistent with the econometric literature. However, the possibility remains that for both sexes other dimensions of labor supply-human capital decisions, time of retirement, choice of occupation-might be affected by the tax system. 3oAs evidence on these issues begins to accumulate, presumably it can be incorporated into TAXSIM.

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