Measuring the deadweight loss from taxation in a small open economy: A general method with an application to Sweden

TY - JOUR

T1 - Measuring the deadweight loss from taxation in a small open economy

T2 - A general method with an application to Sweden

AU - Sørensen, Peter Birch

N1 - JEL classification: H21

PY - 2014/9

Y1 - 2014/9

N2 - The paper develops a simple general equilibrium framework for calculating the marginal deadweight loss from taxation in a small open economy. The framework allows a decomposition of the deadweight loss from each tax instrument into the losses stemming from the contraction of the different tax bases. The paper describes a method of calibrating the model which exploits the links between the various factor supply elasticities implied by the standard life cycle model. It also presents a method of estimating effective tax rates that is consistent with optimising household and firm behaviour. To illustrate how the model works, it is calibrated to a data set for Sweden. The quantitative results indicate that more than half of the marginal deadweight loss from taxes on capital may stem from their negative impact on the tax bases for labour income and consumption.

AB - The paper develops a simple general equilibrium framework for calculating the marginal deadweight loss from taxation in a small open economy. The framework allows a decomposition of the deadweight loss from each tax instrument into the losses stemming from the contraction of the different tax bases. The paper describes a method of calibrating the model which exploits the links between the various factor supply elasticities implied by the standard life cycle model. It also presents a method of estimating effective tax rates that is consistent with optimising household and firm behaviour. To illustrate how the model works, it is calibrated to a data set for Sweden. The quantitative results indicate that more than half of the marginal deadweight loss from taxes on capital may stem from their negative impact on the tax bases for labour income and consumption.

KW - Faculty of Social Sciences

KW - Deadweight loss

KW - Tax policy in a small open economy

U2 - 10.1016/j.jpubeco.2014.06.001

DO - 10.1016/j.jpubeco.2014.06.001

M3 - Journal article

SN - 0047-2727

VL - 117

SP - 115

EP - 124

JO - Journal of Public Economics

JF - Journal of Public Economics

ER -