Essays in Honor of Roy Bahl
Studies in Fiscal Federalism and State–local Finance series
Edited by Richard M. Bird and Jorge Martinez-Vazquez
Chapter 3: Modeling tax reform in developing countries
The evaluation of tax policy reforms has typically addressed two main issues: the efficiency and equity of the underlying tax code. Among the various analytical methodologies used for the analysis, two stand out. These are Computational General Equilibrium (CGE) models and Micro-simulation models (MSM). Each of them has certain advantages and disadvantages that have been considered by different researchers. While each instrument provides a useful type of analysis for each goal, they also include some drawbacks related with their main structures. In order to exploit their strengths, there has been an interest in linking these models either by integrating them or by treating them in a layered manner. The focus of this chapter is to address the efforts to link the two models and the methodologies that have been used for that purpose. A review of the literature provides an interesting insight into this effort at two levels, empirically and methodologically. The empirical approach refers to the kind of reforms that have been considered in a variety of countries, as well as what kind of economies have been applying them. The methodological approaches are essentially mechanical: they identify what are the main strategies used to link the two models, and what are the main strengths and limitations associated with those strategies. This chapter will survey the literature on these two approaches, and will try to come to some general conclusions about whether there are any general conclusions to be drawn.
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