Evaluating tax reforms without utility measures: the performance of revenue potentialities

Fabrizio Bulckaen, Alberto Pench and Marco Stampini

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

Abstract: The desirability of revenue-neutral commodity tax reforms is traditionally evaluated by comparing the marginal cost of public funds (MCF) raised through different taxes. In simple theoretical models, however, it is possible to rely on more simple indicators, which do not imply a measure of consumer utility (Hatta (1986), Slemrod and Yitzhaki (1996), Bulckaen and Stampini (2001)). Unfortunately, the extension of such appealing policy rules to more complex economic frameworks is not straightforward and has not been assessed so far. We attempt to fill this gap and analyze the reliability of decisions based on revenue potentialities - defined as ratio between marginal revenue and tax base - through simulations within a numerical model of the Italian economy. Six hundred commodity tax reforms are simulated, with very encouraging results: forecasts based on the comparison of revenue potentialities are correct in 83 percent of cases simulated. Furthermore, forecast precision increases to 100 percent when revenue potentialities are sufficiently differentiated. Overall, the paper shows that revenue potentialities are reliable indicators for policy making.

Keywords: commodity tax reforms; revenue potentiality; marginal cost of public funds (MCF) (search for similar items in EconPapers)
JEL-codes: D58 H2 (search for similar items in EconPapers)
Date: 2003-01-01
Note: ISSN 2039-1854
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Citations: View citations in EconPapers (1)

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