Population ageing and fiscal sustainability : an integrated micro-macro analysis of required tax changes
Working paper
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Date
2004Metadata
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- Discussion Papers [1004]
Abstract
Abstract:
Most studies on the economic consequences of ageing rely on Computable General Equilibrium
(CGE) models that account for feedback mechanisms through changes in relative prices, tax bases
etc. However, since individual labour supply behaviour is considered to be a key element in CGEanalyses
of fiscal sustainability problems, the results of these analyses may depend crucially on how
the labour supply behaviour is modelled. The current practice of combining a simplified
representation of the tax and transfer system with the labour supply behaviour of a few representative
agents may render a misleading description of incentives and revenue effects. The purpose of
this paper is to demonstrate the importance of using an alternative strategy by integrating a detailed
microeconometric model of labour supply, that is sufficiently flexible to capture a large variety of
labour supply responses, with a large-scale CGE model. The integrated micro-macro CGE model is
employed to explore how endogenous household labour supply behaviour affects and interacts with
sustainability problems in Norway. The empirical results suggest that the required increase in the
future tax burden is less dramatic when the analysis allows for a flexible representation of the labour
supply behaviour. Moreover, by replacing the current progressive tax system with a flat tax system it
is found that the pressure on future public finances is significantly reduced.