Integrated Modelling of the Impact of Direct and Indirect Taxes Using Complementary Datasets

Michael Savage

Abstract


Comprehensive modelling of the impact of taxes and tax policy options requires data on the impact at micro-level of both direct and indirect taxes. With some exceptions, most national expenditure surveys are not suitable for use in detailed modelling of the direct tax and welfare system. This makes approaches that impute expenditure data into detailed income surveys of considerable interest. Using a commonly applied method of imputing expenditure data into an income survey, this paper examines the degree of sensitivity in the distribution of household expenditure, and following that the distributional impact of indirect taxes, as the analysis moves from being based on actual expenditure data as recorded in the Irish Household Budget Survey (HBS), to being based on expenditure data imputed to the Irish Survey on Income and Living Conditions (SILC). Most sensitivity is found in the estimation and imputation of expenditure data for the bottom income decile. Nonetheless, the imputation process is shown to produce highly comparable distributional results when compared with actual expenditure data. An application of an indirect tax microsimulation model integrated with SWITCH, the ESRI tax-benefit microsimulation model, examines the distributional effects of simultaneous reforms of the direct tax, indirect tax, and social welfare systems, illustrating the analytical capability of the approach tested here.

Keywords


taxation; modelling; Ireland

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