Economics - Research Publications

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    Discounting and the social time preference rate
    Creedy, J. ( 2007-03)
    This paper shows that the emphasis on a social time preference rate(defined as the sum of a pure time preference rate and the productof the elasticity of marginal valuation and the growth rate) in socialevaluations where money values are discounted using the social timepreference rate, is not advisable. It can give an entirely different, andarbitrary, ranking of alternative streams compared with the direct useof the pure time preference rate to discount ‘social welfare’ in eachperiod (where social welfare is a — usually isoelastic — function ofmoney values).
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    Corporation tax buoyancy and revenue elasticity in the UK
    Creedy, J. ; Gemmell, N. ( 2007-01)
    Observed changes in corporation tax revenues from year to year,which include the effects of changes in tax rates, deductions and compliance,appear to be highly volatile relative to profits, the tax base.This paper examines whether the ‘built-in’ fiscal drag properties ofcorporation tax can be expected to display similar properties. Simple,conceptual modelling demonstrates that the corporate tax revenueelasticity does indeed display this property in the presence of regularcyclical fluctuation in profit growth, suggesting that much of theobserved volatility is inherent to the corporation tax system.
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    Corporation tax revenue growth in the UK:a microsimulation analysis
    Creedy, J. ; Gemmell, N. ( 2007-01)
    This paper examines the built-in flexibility properties — as measuredby the elasticity of revenue with respect to profits — of the UKcorporation tax system. Emphasis is placed on determining some ofthe major influences on the extent to which total corporation taxrevenue changes when profits change over the economic cycle. A microsimulationmodel, CorpSim, is constructed and used to obtainnumerical results. In the model, corporations use group relief, capitalallowances and losses in a tax-minimising manner. The growth ofaggregate corporation tax revenue in practice in the UK appears tobe highly volatile in relation to the growth of profits. High volatilityin revenue elasticities is found to be especially associated witheconomic downturns. In mild economic downturns, corporation taxrevenue elasticities may rise (because tax growth falls less than profitgrowth), but in more severe downturns, large but temporary decreasesin revenue elasticities (and even negative elasticities) can be expected.??This research was conducted while Norman Gemmell was at HM Revenue & Customs’Analysis department. We are grateful to colleagues there for their support of this research,especially David Ulph and Edwin Ko. The views expressed in this paper are those of theauthors and do not necessarily reflect those of HMRC. We are grateful for comments fromparticipants at presentations at HMRC, HM Treasury and the New Zealand Treasury andInland Revenue Department.
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    Discrete hours labour supply modelling: specification, estimation and simulation
    Creedy, J. ; Kalb, G. R. ( 2005-03)
    The assumption behind discrete hours labour supply modellingis that utility-maximising individuals choose from a relatively smallnumber of hours levels, rather than being able to vary hours workedcontinuously. Such models are becoming widely used in view of theirsubstantial advantages, compared with a continuous hours approach,when estimating and their role in tax policy microsimulation. Thispaper provides an introduction to the basic analytics of discrete hourslabour supply modelling. Special attention is given to model specification,maximum likelihood estimation and microsimulation of taxreforms. The analysis is at each stage illustrated by the use of numericalexamples. At the end, an empirical example of a hypotheticalpolicy change to the social security system is given to illustrate the roleof discrete hours microsimulation in the analysis of tax and transferpolicy changes.
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    Excise taxation in New Zealand
    Creedy, J. ; Sleeman, C. ( 2005-03)
    In New Zealand, excise taxes are levied on three commodity groups: alcohol, tobacco andpetrol. The 2001 Tax Review, published by the New Zealand Treasury, argued thatexcises are inequitable and inefficient, and advised that these taxes should be removedand the revenue replaced by raising the standard rate of GST. This paper provides anempirical examination of these issues. First, the efficiency of New Zealand’s currentsystem of indirect taxes is examined. The welfare and redistributive effects resulting fromthe revenue-neutral removal of excise taxes are then examined. Welfare and redistributivemeasures are computed for a range of demographic groups and total weekly expenditurelevels. While the largest efficiency gains and reductions in inequality are observed forhouseholds with at least one smoker, the overall distributional implications of theproposed reforms are found to be small.
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    Indirect taxation and progressivity: revenue and welfare changes
    Creedy, J. ; Sleeman, C. ( 2005-03)
    This paper compares the disproportional effects of indirect taxation using two alternativemeasures, tax-progressivity and welfare-progressivity. In the context of an indirect taximposed on a single good, tax-progressivity requires the taxed good to be luxury. Incontrast, welfare-progressivity requires the equivalent variation as fraction of totalexpenditure to rise with total expenditure. Sufficient conditions for welfare-progressivityare derived for both the Linear Expenditure System (LES) and the Almost Ideal DemandSystem (AIDS). When the parameters of the direct utility functions are held constant,imposing homogeneous preferences, the condition required for welfare-progressivity isthe same as that required for tax-progressivity, namely that the taxed good is a luxury.Parameter constancy also implies a particular pattern for the variation in budget shareswith total expenditure, which is unique for each demand system. When parameters areallowed to vary with total expenditure, according to a general budget share relationship,which enables preference heterogeneity amongst households, welfare-progressivity isindependent of tax-progressivity for both models, giving rise to possible conflicts in taxand welfare disproportionality. The empirical application of these conditions to NewZealand data shows that many such cases of conflict can arise. Furthermore, conflictingresults are also obtained when examining the effects of the overall indirect tax structure.The majority of conflicts arise where tax-regressivity exists at the same time as welfare-progressivity.
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    Behavioural microsimulation modelling with the Melbourne Institute Tax and Transfer Simulation (MITTS): uses and extensions
    Creedy, J. ; Kalb, G. R. ( 2005-03)
    This paper describes microsimulation modelling in non-technical terms; and it explainswhat can be achieved with microsimulation modelling in general, and the MelbourneInstitute Tax and Transfer Simulator (MITTS) in particular. The focus is onbehavioural microsimulation modelling, which takes individuals’ labour supplyresponses into account when analysing tax and transfer reforms. Microsimulationmodels are built to replicate closely the considerable degree of heterogeneity observedin the population. Several examples of recent uses of MITTS are given and brieflydescribed. In addition, one worked-out example is presented to illustrate some of thefeatures and typical outputs of MITTS. Given the relatively recent development ofbehavioural microsimulation models, there are several opportunities for furtherextensions. For example, it would be valuable to allow for the demand side of labour,indicating whether new labour force participants are likely to find work; or to allow forlife-cycle dynamics, which are important to deal with population-ageing issues or withfemale labour force participation.
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    Carbon dioxide emissions reductions in New Zealand: a minimum disruption approach
    Creedy, J. ; Sleeman, C. ( 2005-03)
    Reductions in carbon dioxide emissions can come from (among other things) changes to the structure of final demands, changes in the use of fossil fuels by industry, and changes to the structure of inter-industry transactions. This paper examines the nature of the least disruptive changes, that is the minimum changes to these three components which are consistent with specified overall reductions in carbon dioxide emissions in New Zealand. In examining the minimum changes needed, constraints are imposed on the corresponding changes in GDP growth and aggregate employment.
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    Accounting for population ageing in tax microsimulation modelling by survey reweighting
    Cai, L. ; Creedy, J. ; Kalb, G. R. ( 2005-03)
    This paper investigates the use of sample reweighting in a behavioural taxmicrosimulation model, to examine the implications for government taxes andexpenditure of population ageing in Australia. First, a calibration approach to samplereweighting is described, producing new weights which achieve specified populationtotals for selected variables, subject to the constraint that there are minimal adjustmentsto the weights. Second, the performance of the Australian Bureau of Statistics’ (ABS)weights provided with the 2001 Survey of Income and Housing Cost (SIHC) wasexamined and it was found that reweighting does not improve the simulation outcomesfor the 2001 situation, so the original ABS weights were retained for 2001. Third, theimplications of changes in the age distribution of the population were examined, basedon population projections to 2050. A ‘pure’ change in the age distribution wasexamined by keeping the aggregate population size fixed and changing only the relativefrequencies in different age-gender groups. Finally, the effects of a policy change tobenefit taper rates in Australia were compared for 2001 and 2050 population weights. Itis suggested that this type of exercise provides an insight into the implications ofchanges in the population on government income tax revenue and social securityexpenditure, indicating likely pressures for policy changes.
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    Confidence intervals for policy reforms in behavioural tax microsimulation modelling
    Creedy, J. ; Kalb, G. R. ; Kew, H. ( 2005-03)
    This paper addresses the need for a measure of the uncertaintythat is associated with the results calculated through tax policy behaviouralmicrosimulation modelling. Deriving the analytical measurewould be extremely complicated, therefore, a simulated approach isproposed which generates a pseudo sampling distribution of aggregatemeasures based on the sampling distribution of the estimated laboursupply parameters. This approach, which is very computer intensive,is compared to a more time-efficient approach where the functionalform of the sampling distribution is assumed to be normal. The resultsshow that in many instances the results from the two approachesare quite similar. The exception is when aggregate measures for minortypes of payments, involving relatively small groups of the population,are examined.