Working Paper: NBER ID: w1461
Authors: Joel Slemrod
Abstract: This paper develops a methodology in integrating the information from a micro-unit data file of tax returns into the framework of a general equilibrium model of taxation with endogenous financial behavior. It discusses how the available information on capital income flows can be used to impute portfolios to households, and how these portfolios and the other observed characteristics of the households can be made consistent with expected utility maximization. In order to illustrate the value of this methodology, it is applied to a study of the general equilibrium impact of instituting a flat-rate income tax system. The analysis reveals that there would be substantial changes in the pattern of rates of return and the distribution of asset ownership.The sectoral allocation of capital does not, though, change substantially. The micro-unit data base shows that, in general, lower-income households are worse off and the higher-income households are better off, although there is substantial dispersion of welfare change within income groups. Because these results rest on a very simple model of the economy and a particular data imputation procedure and parameterization, they should not be taken literally as a guide to policy decisions. Nevertheless, they do indicate that substantial insight can be provided by integrating micro-unit data with general equilibrium tax modeling.
Keywords: Taxation; General Equilibrium; Microunit Data; Flatrate Income Tax; Welfare Effects
JEL Codes: H21; H24; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flatrate income tax (H29) | rates of return (G12) |
| flatrate income tax (H29) | distribution of asset ownership (D33) |
| flatrate income tax (H29) | household welfare (I38) |
| rates of return (G12) | household welfare (I38) |
| flatrate income tax (H29) | capital allocation (G31) |
| flatrate income tax (H29) | distributional impacts (D39) |