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GTAP Resource #3582

"The marginal costs of funds in the VATTAGE model of Finland: a back of the envelope justification of the welfare effects of additional government revenue"
by Honkatukia, Juha, Peter Dixon and Maureen Rimmer

This paper is part of a larger study on public finance aspects of population ageing in Finland.
We are using the VATTAGE model to calculate the welfare effects of various tax increases designed to improve the budgetary position of the Finnish government, that is we are calculating the marginal cost of funds (MCF) raised by different taxes. VATTAGE has been extended to include leisure and savings choice in the specification of household behaviour. This extension is necessary for useful MCF calculations.
The main contribution of this paper is the development of a back-of-the-envelope (BOTE) equation to guide the explanation of MCF results generated from a full-scale, dynamic CGE model.

Following this, the paper provides a detailed back-of-the-envelope (BOTE) calculation to explain the MCF results in terms of 6 effects taken into account in VATTAGE:
(1) the employment/leisure effect. This is the deadweight loss caused by tax distortion of consumer choices between labour and leisure.
(2) the import effect. This is the deadweight loss caused by reductions in imports which carry welfare-affecting tariffs.
(3) the terms-of-trade effect. This is the effect on consumer welfare of changes in the terms of trade induced through changes in exports and imports caused by changes in the taxes under consideration.
(4) the involuntary unemployment effect. This effect arises in sticky-wage simulations in which changes in tax rates can cause involuntary unemployment.
(5) the inter-temporal trade-off effect. This effect captures tax-induced distortions in the saving/consumption decisions of households.
(6) the government expenditure effect. This effect is concerned with the implications for consumer welfare of changes in public expenditure.
The final section contains concluding remarks and plans for future research.

Resource Details (Export Citation) GTAP Keywords
Category: 2011 Conference Paper
Status: Published
By/In: Presented at the 14th Annual Conference on Global Economic Analysis, Venice, Italy
Date: 2011
Created: Honkatukia, J. (4/15/2011)
Updated: Batta, G. (4/15/2011)
Visits: 2,072
- Economic growth
- Dynamic modeling
- Calibration and parameter estimation
- Europe (Northern)
- European Union

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