The Benefits of Linking CGE and Microsimulation Models: Evidence from a Flat Tax Analysis

IZA Discussion Paper No. 3715

FiFo-CPE Discussion Paper No. 08-6

35 Pages Posted: 6 Oct 2008

See all articles by Andreas Peichl

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research; University of Mannheim - School of Economics (VWL); IZA Institute of Labor Economics; University of Essex - Institute for Social and Economic Research (ISER)

Date Written: September 2008

Abstract

Mircrosimulation models (MSM) and Computable General Equilibrium models (CGE) have both been widely used in policy analysis. The combination of these two model types allows the utilisation of the advantages of both types. The aim of this paper is to describe the state-of-the-art in simulation and to demonstrate the benefits of linking both model types modelling flat tax reform proposals for Germany. Taking the general equilibrium effects into account has important implications for the evaluation of a tax reform. The analysis shows that a personal income flat tax can indeed overcome the fundamental equity efficiency trade-off in the long-run while simultaneously increasing the tax revenue. However, this result does not hold for a flat tax combining a personal income flat tax with a corporate cash flow flat tax, even when allowing for an ex-post loss in revenue.

Keywords: microsimulation, CGE, linked micro macro models, flat tax

JEL Classification: D58, H2, J22

Suggested Citation

Peichl, Andreas, The Benefits of Linking CGE and Microsimulation Models: Evidence from a Flat Tax Analysis (September 2008). IZA Discussion Paper No. 3715, FiFo-CPE Discussion Paper No. 08-6, Available at SSRN: https://ssrn.com/abstract=1278915 or http://dx.doi.org/10.2139/ssrn.1278915

Andreas Peichl (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Essex - Institute for Social and Economic Research (ISER)

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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