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GTAP Resource #3877

"The Marginal Cost of Funds from Different Taxes in Finland – An AGE evaluation "
by Dixon, Peter, Juha Honkatukia and Maureen Rimmer

The efficiency of the overall tax system has been debated in many countries for a long time now; in Finland, the debate has been mostly motivated by concern over the sustainability of public finances in the face of the increasing cost of providing public services and pensions for an ageing population. The current economic turmoil has added urgency to the debate, as the public sector deficit has rapidly grown. The challenge is two-fold: the ageing of the population increases age-related expenses, which should be met with rising tax revenues; but it also decreases labour supply, which tends to have the effect of lowering tax revenues. However, as taxation also has an effect on the incentives to work and to invest, solving this two-fold problem calls for a comprehensive re-evaluation of the structure of the whole tax system. The aim of this study is to compare the welfare costs of raising revenue with different types of taxes, thus providing analyses and assessments that can be used in the evaluation of tax reforms. We focus on the effects of labour and capital income taxes, and consumption taxes.
We are using VATTAGE, an AGE model of the Finnish economy, to compare the welfare effects of tax increases designed to reduce Finland’s budget deficits by using the concept of marginal cost of funds (MCF) for different taxes. VATTAGE is a MONASH-style model of Finland documented in Honkatukia (2009). However, unlike the original MONASH model, VATTAGE has been extended to include leisure and savings choice in the specification of household behaviour. This extension is necessary for useful MCF calculations because the essence of these calculations is tax-induced distortions in choices between consumption, leisure and savings. The VATTAGE database relies on disaggregated data on the economy and allows us to distinguish between commodity taxes and taxes on different types of factor incomes as well as taxes on income transfers.
In the current study, we model welfare w...

Resource Details (Export Citation) GTAP Keywords
Category: 2012 Conference Paper
Status: Published
By/In: Presented at the 15th Annual Conference on Global Economic Analysis, Geneva, Switzerland
Date: 2012
Created: Honkatukia, J. (4/30/2012)
Updated: Honkatukia, J. (4/30/2012)
Visits: 2,798
- Economic growth
- Labor market issues
- Dynamic modeling
- European Union

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