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Journal of Undergraduate Research

Keywords

integration of microsimulation model, dynamic scoring model, tax policy

College

Family, Home, and Social Sciences

Department

Economics

Abstract

We integrated individual tax rates produced by a microsimulation tax policy model with a dynamic general equilibrium tax policy model. We can use this to conduct macroeconomic analysis or score hypothetical tax policies. This approach captures the rich heterogeneity, realistic demographics, and tax-code nuance of the microsimulation model and includes this nuance to increase the accuracy of a general equilibrium model with an elevated level of heterogeneity. Furthermore, we derive a functional form which suggests that tax rates depend both on capital income and labor income. Applying this approach to a canonical example of tax policy change—a cut of 10% in statutory marginal income tax rates and a two-fold increase of the standard deduction, we find an increase of gross domestic product (GDP) by about 1.4%. Accounting for these macroeconomic effects of the tax change results in an offset of about 53% of the static cost of the tax cuts.

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Economics Commons

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