Local taxes in Buenos Aires City: a general equilibrium effects

Leonardo Mastronardi, Carlos Romero and Omar Chisari

No 3879, EcoMod2012 from EcoMod

Abstract: In recent years, the computable general equilibrium (CGE) models for different regions have become an important area for research in economics. The aim of this paper is to analyze the fiscal policy and the effects of fiscal federalism to economic agents in a regional economy context. For this purpose we have built an interregional general equilibrium model for Argentina to conduct different simulations on changes in regional fiscal policy. We separate Argentina in two regions, Buenos Aires City (BAC) and the rest of the country. This is the first approach for the country and it is important to take political or economic decisions because allows to quantify direct and indirect regional effects. To construct an interregional computable general equilibrium model we must follow different steps. First, we need to make an interregional social accounting matrix (RSAM), which includes flows between households, regional sectors, government and external sector. Unfortunately, Buenos Aires does not have a Input Output Tables or a regional account system, so we have to construct the model with non survey and calibration techniques and other estimations. When we calibrate the RSAM, finding the equilibrium between supply and demand in each market, we are able to take the RSAM data and make a computable interregional general equilibrium model using MPSGE platform on GAMS program. The model contains 10 sectors of activity and two types of household (rich and poor) in each region. Moreover it includes a external sector (that commerce with each region), a local government for BAC that decides local fiscal policy in BAC region and a national government that decides national fiscal policy and local fiscal policy in the rest of the country. As we said before, we want to understand regional differences in terms of welfare and levels of activity in changes on fiscal policy. The idea is to measure the winners and losers when the central government changes your national policy into the region (in this case in Buenos Aires and in the rest of the country), and when local government changes your tax policy. Therefore we use the regional CGE model to capture these things. Into the paper we analyze the effects for economics agents of changes in important taxes of the country like regional sales tax or other regional taxes (decided by local governments) and national value added tax, national import tariffs or national factors taxes (decided by national government). Preliminary simulations allow us to provide some examples of the results. If hypothetically BAC local government increases regional taxes, then drops the welfare of households (in two regions) and fall the level of activity in either regions, falling the regional GDP in two regions. When we analyze the governments, BAC government welfare is increased while the national government welfare worsens. An increase in national value added tax generates in each region a drop (in different proportions) in the regional GDP and increasing the regional unemployment rate. The price level rises in each region. It produces a decline in the welfare of households. Moreover the national government increases it welfare but BAC government decline it. These results differs depending on the type of tax because it is different a property tax that a tax in production. Factor mobility is also a key determinant when looking the quantitative and qualitative results.

Keywords: Argentina; General equilibrium modeling (CGE); Regional modeling (search for similar items in EconPapers)
Date: 2012-07-01
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