Point us to his methodology. The $250 Billion number that is usually thrown around was calculated by looking at the numbers of forms that were filed, multiplying it by the time the IRS says it takes to keep records and fill out the form and multiplying it by some hourly rate. That means the $250 Billion number thrown around is bore mostly by individuals not by businesses and are not neccessarily actual costs.
Point us to his methodology.
The $250 Billion number that is usually thrown around was calculated by looking at the numbers of forms that were filed, multiplying it by the time the IRS says it takes to keep records and fill out the form and multiplying it by some hourly rate. That means the $250 Billion number thrown around is bore mostly by individuals not by businesses and are not neccessarily actual costs.
Jorgenson's methodology derives from empirical studies utilizing time series price vs tax change, and evaluating parametric functions derived from them based feeding the inputs of the base simulation modules implemented in his IGEM.
http://post.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf
THE ECONOMIC IMPACT OF
FUNDAMENTAL TAX REFORM
by Dale W. Jorgenson; Harvard University
and Peter J. Wilcoxen; University of Texas, AustinThis paper was prepared for presentation at the
Baker Institute Conference
on Tax Policy Reform
Rice University; Houston, Texas
November 6, 1998INTRODUCTION
In this paper we present a new inter-temporal general equilibrium model for analyzing the economic impact of tax policies in the U.S. We preserve the key features of more highly aggregated models like that of Jorgenson and Yun (1990, 1991a). One important dimension for disaggregation is to introduce a distinction between industries and commodities in order to model business responses to tax-induced price changes. We also distinguish among households by level of wealth and demographic characteristics, so that we can model differences in household responses to tax changes. This is also useful in examining the distributional effects of taxes. We present the model in more detail in the following section.
We model demands for different types of capital services in each of thirty-five industrial sectors of the U.S. economy and the household sector. These demands depend on tax policies through measures of the cost of capital presented by Jorgenson and Yun (1991b) that incorporate the characteristic features of U.S. tax law. The cost of capital makes it possible to represent the economically relevant features of highly complex tax statutes in a very succinct form. The cost of capital also summarizes information about the future consequences of investment decisions required for current decisions about capital allocation. We describe the provisions of U.S. tax law that have been incorporated into our model in the third section.
In the fourth section we illustrate the application of our new model by simulating the economic impacts of fundamental tax reforms. We consider the effects of substituting a tax on period 1947 through 1985.’ The data for each year are divided between a use table and a make table.The use table shows the quantities of each commodity-intermediate inputs, primary factors of production, and noncompeting imports-used by each industry and final demand category.2 The make table gives the amount of each commodity produced by each industry.In the absence of joint production this would be a diagonal array. The organization of the use and make tables is illustrated in Figures 1 and 2; Table 2 provides definitions of the variables appearing in these figures.
The econometric method for choosing the parameters of our model stands in sharp contrast to the calibration method used in previous general equilibrium models of tax policies. Calibration involves choosing parameters to replicate the data for a particular year.3 Almost all general equilibrium models employ the assumption of fixed “input-output” coefficients for intermediate goods, following Johansen (1960).This allows the ratio of the input of each commodity to the output of an industry to be calculated from a single use table like the one presented in Figure 1; however, it rules out substitution among intermediate goods, such as energy and materials, by assumption. It also ignores the distinction between industries and commodities and rules out joint production.
The econometric approach to parameterization has several advantages over the calibration approach. First, by using an extensive time series of data rather than a single data point, we can derive the response of production patterns to changes in prices from historical experience. This is particularly important for the analysis of tax policies, since these policies have changed substantially during our sample period and tax rates have varied widely. The extensive time series evidence on behavioral responses to changes in tax policy is ignored in the calibration approach.
A second advantage of the econometric approach is that parameters estimated from time series are much less likely to be affected by the peculiarities of a particular time period. By construction, parameters obtained by calibration are forced to absorb all the random errors present in the data for a single benchmark year. This poses a severe problem when the benchmark year is unusual in some respect. For example, parameters calibrated to the year 1973 would incorporate into the model all the distortions in energy markets that resulted from price controls and the rationing of energy during the first oil crisis. Econometric parameterization greatly mitigates this problem by reducing the influence of disturbances for a particular time period.
Empirical evidence on substitutability among inputs is essential in analyzing the impact of tax policies. If it is easy for industries to substitute among inputs, the effects of these policies will be very different than if substitution were limited. Although calibration avoids the burden of data collection required by econometric estimation, it rules out substitutability among inputs by assumption. This can easily lead to substantial distortions in estimating the impacts of alternative tax policies. By contrast the econometric approach determines the extent of substitutability on the basis of empirical evidence.
Consumer Behavior
The substitution of a consumption tax for an income tax would affect relative prices faced by consumers. However, this substitution would have different impacts on different households. To capture these differences, we have subdivided the household sector into demographic groups that differ by family size, age of head, region of residence, race, and urban versus rural location. We treat each household as a consuming unit, so that the household behaves like an individual maximizing a utility function.
We represent the preferences of each household by means of an econometric model of consumer behavior. Our models of consumer behavior incorporate time series data on personal consumption expenditures from the annual inter-industry transactions tables for the U.S. economy represented in Figure 1. The econometric approach to parameterization enables us to derive from historical experience the response of household expenditure patterns to changes in prices. Empirical evidence on substitutability among goods and services by households is essential in analyzing the impact of alternative tax policies. If it is easy for households to substitute among commodities, the effects of these policies will be very different than if substitution were limited.
The econometric approach to modeling consumer behavior has the same advantages over the calibration approach as those we have described for modeling producer behavior. Our models of consumer behavior incorporate detailed cross section data on the impact of demographic differences among households and levels of total expenditure on household expenditure patterns. We do not require that consumer demands must be homothetic, so that patterns of individual expenditure change as total expenditure varies, even in the absence of price changes. Consumer demands also depend on the demographic composition of the population. These features of our model capture important characteristics of household expenditure patterns often ignored in general equilibrium modeling.
Finally, we aggregate over individual demand functions to obtain a system of aggregate demand functions. This makes it possible to dispense with the notion of a representative consumer. The system of aggregate demand fimctions allocates total expenditure to broad groups of consumer goods and services. Given prices and total expenditure, this system allows us to calculate the elements of personal consumption column in the make table of Figure 1. We employ the model to represent aggregate consumer behavior in simulations of the U.S. economy under alternative tax policies.
To determine the level of total expenditure we embed our model of personal consumption expenditures in a higher-level system that represents consumer preferences between goods and leisure and between saving and consumption. At the highest level each household allocates full wealth, defined as the sum of human and nonhuman wealth, across time periods. We formalize this decision by introducing an infinite-lived representative agent who maximizes an additive inter-temporal utility function, subject to an intertemporal budget constraint. The allocation of full wealth is determined by the rate of time preference and the intertemporal elasticity of substitution. The representative agent framework requires that intertemporal preferences must be identical for all households.
We model the household allocation decision by assuming that till consumption is an aggregate of goods and leisure. Our model of consumer behavior allocates the value of full consumption between personal consumption expenditures and leisure time. Given aggregate expenditure on goods and services and its distribution among households, this model then allocates personal consumption expenditures among commodity groups, including capital and labor services and noncompeting imports. Finally, the income of the household sector is the sum of incomes from the supply of capital and labor services, interest payments from governments and the rest of the world, all net of taxes, and transfers from the government. Savings are equal to the difference between income and consumption, less personal transfers to foreigners and nontax payments to governments.