Working Paper: NBER ID: w1996
Authors: Mervyn A. King
Abstract: Over the last decade increasing use has been made of individual household \ndata to analyse the gains and losses from tax reform. Much attention has \nbeen paid to the econometric estimation of models of household responses to \ntaxes. But these models yield valid estimates of the welfare consequences \nof tax changes only when the implied preference orderings are well behaved. \nThis paper discusses the nature of such conditions in detail. Where there \nare rionlinearities in the budget constraint then two sets of "primal" and \n"dual" conditions must be satisfied. The analysis of these conditions \nyields suggestions for the specification of behavioural models and the use \nof individual-specific information in the observed data.
Keywords: tax reform; welfare analysis; econometric modeling; household data
JEL Codes: H21; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax reforms (H29) | variations in net incomes and welfare (D63) |
| absence of a representative consumer (D19) | aggregate models fail to capture true effects of tax reforms (H31) |
| nonlinearities in budget constraints (D10) | inconsistent welfare analysis (D69) |
| valid welfare analysis requires adherence to primal and dual conditions (D60) | accurate welfare analysis (D69) |
| welfare gain from tax reform (D69) | vector of gains or losses for each household (G59) |
| satisfaction of primal and dual conditions (C62) | valid welfare analysis (D69) |