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Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework

Rachel Moore and Brandon Pecoraro ()

MPRA Paper from University Library of Munich, Germany

Abstract: Fiscal policy analysis in heterogeneous-agent models typically involves the use of smooth tax functions to approximate present tax law and proposed reforms. We argue that the tax detail omitted under this conventional approach has macroeconomic implications relevant for policy analysis. In this paper, we develop an alternative approach by embedding an internal tax calculator into a large-scale overlapping generations model that explicitly models key provisions in the Internal Revenue Code applied to labor income. While both approaches generate similar policy-induced patterns of economic activity, we find that the similarities mask differences in key economic aggregates and welfare due to variation in the underlying distribution of household labor supply responses. Absent sufficient tax detail, analysis of specific policy changes - particularly those involving large, discrete effects on a relatively small group of households - using heterogeneous-agent models can be unreliable.

Keywords: dynamic scoring; tax policy; tax functions and calculators; heterogeneous agents (search for similar items in EconPapers)
JEL-codes: C63 E62 H30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2018-06-08
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