Quantifying Efficient Tax Reform

Tax forms

In conjunction with our efforts, led by Kurt Winkelmann, to develop a framework for evaluating tradeoffs in potential pension reforms, Ellen McGrattan is working to develop an umbrella framework that can be used to address a wide variety of public finance questions. Along with Job Boerma, a PhD candidate at the University of Minnesota, McGrattan has published two working papers on this topic.

In the first working paper,

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, the authors study the design of health care and tax policies in a quantitative macroeconomic model. Health expenditures are large and increasing, and there are vast differences in health expenditures and mortality rates across income groups. The paper looks at how to optimally allocate health resources in an economy with privately observed health and labor productivity shocks. McGrattan and Boerma compare the results to actual policies and household allocations in the Netherlands, a country with a single-payer system but large disparities in health expenditures and mortality rates.

In the second working paper, Quantifying Efficient Tax Reform, McGrattan and Boerma seek to answer two questions: how large are welfare gains from efficient tax reform, and how sensitive is the answer to modeling choices? Again using data from the Netherlands, the analysis found a total welfare gain of 20 percent for an efficient reform in which all individuals are made better off by the same percentage. The working paper identifies several areas for further work to refine and confirm the findings.

This line of research is especially relevant to policy questions requiring accurate predictions of micro data from household surveys and macro data from the national accounts. The data, models, and calculations developed through this research will be used in tandem with our public pension framework with the potential to inform an array of important public finance questions.

Ellen McGrattan is the director of the Heller-Hurwicz Economics Institute and a Professor in the Department of Economics at the University of Minnesota.
Job Boerma is a PhD candidate in the Department of Economics at the University of Minnesota.

 

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