Follow us
Publications Commentary Research People Events News Resources and Videos About IFS
Home Publications Tax reform and welfare measurement: do we need demand system estimation?

Tax reform and welfare measurement: do we need demand system estimation?

Journal article | Economic Journal

The exact measurement of the welfare costs of tax and price reform requires a detailed knowledge of individual preferences. Typically, first-order approximations of welfare costs are calculated avoiding detailed knowledge of substitution effects. The authors derive second-order approximations which, unlike first-order approximations, require knowledge of the distribution of substitution elasticities. This paper asks to what extent simple approximations can be used to measure the welfare costs of tax reform and evaluates the magnitude of the biases for a plausible size tax reform. In the authors' empirical examples, first-order approximations display systematic biases; second-order approximations always work well.

More on this topic

Newspaper article
reform_to_recover
External publication
Aligning tax rates between employees and the self-employed would reduce inequity while encouraging entrepreneurial risk-taking, says Stuart Adam, senior research economist at the Institute for Fiscal Studies.
Report
The parts of the UK tax system that dictate how different forms of income are taxed are of central importance and are not fit for purpose.
IFS Working Paper W19/31
The UK taxes business income at much lower rates than employment income. In this paper we describe the problems caused by that differentiation and assess the main arguments used to defend it. We summarise the Mirrlees Review’s proposals for radical reform that would align tax rates across legal ...