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Measuring the Deadweight Loss from Taxation in a Small Open Economy. A general method with an application to Sweden

Peter Birch Sørensen
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Peter Birch Sørensen: Department of Economics, University of Copenhagen

No 2011-03, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: The paper develops a simple general equilibrium framework for calculating the marginal deadweight loss from taxation in a small open economy. The framework allows a decomposition of the deadweight loss from each tax instrument into the losses stemming from the contraction of the different tax bases. The paper describes a method of calibrating the model which exploits the links between the various factor supply elasticities implied by the standard life cycle model. It also develops a method of estimating effective tax rates that is consistent with optimising household and firm behaviour. To illustrate how the model works, it is calibrated to a data set for Sweden. The quantitative results highlight the importance of accounting for the interaction between the major tax bases when estimating deadweight loss.

Keywords: Deadweight loss; tax policy in a small open economy (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-10
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