Microsimulators

Taxation and public service systems are not usually static but change, adapting to changes in society, and responding to the needs or decisions of the governments of different countries or, especially recently, to agreements between governments. In Spain, legislation had changed the structure of indirect or special taxes, tax deductions, and even the rates of income tax or social services.

Changes in taxation rates (income tax, VAT, etc.) usually provoke a great deal of political and social debate, and many empirical studies to evaluate their effects on welfare, collection rates, participation in the labour market, etc. The effects of changes of this kind can be very diverse and in some cases detrimental for some households. For this reason it is advisable to examine ex–ante (before putting into practice) and ex–post (after the results are obtained, in a given time frame) how the different reforms which may be introduced affect not only tax collection but the welfare of households (or individuals) or income redistribution.

Although most microsimulation studies available for the Spanish economy are purely academic, there is a growing awareness of the need for instruments to simulate tax reforms with microeconomic data for different spheres. The Institute of Fiscal Studies has also developed this type of methodology and applied it to the analysis of direct, indirect and mixed tax reforms.

Thus, the IEF:

• Simulates reforms in the structure of indirect taxes (Value Added and Special Taxes) and presents measurements of wellbeing (equivalent variation) and collection.
• Simulates changes in income tax, and shows the effects on different situations.
• Studies the changes introduced in mixed tax reforms, with changes in VAT and excises as well as Social Security quotas.
• Carries out hypothetical simulations of reforms of direct, indirect and mixed taxation, following lines of change which can be forecast for the Spanish economy in the future.

In any case, although the work carried out so far does not cover the entire spectrum of possible situations where microsimulation techniques have been applied, the IEF believes that in the near future the Institute’s research in this field, both theoretical and empirical, will be developed further, keeping pace with the exponential growth of the literature on microsimulation and its applications.

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