John Creedy

Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation

The assumption behind discrete hours labour supply modelling is that utility-maximising individuals choose from a relatively small number of hours levels, rather than being able to vary hours worked continuously. Such models are becoming widely used in view of their substantial advantages, compared with a continuous hours approach, when estimating and their role in tax policy microsimulation. This paper provides an introduction to the basic analytics of discrete hours labour supply modelling. Special attention is given to model specification, maximum likelihood estimation and microsimulation of tax reforms. The analysis is at each stage illustrated by the use of numerical examples. At the end, an empirical example of a hypothetical policy change to the social security system is given to illustrate the role of discrete hours microsimulation in the analysis of tax and transfer policy changes.

Behavioural Microsimulation with Labour Supply Responses

This paper provides a technical survey of recent developments in behavioural microsimulation. We discuss the criteria by which models of labour supply may be chosen for application to behavioural microsimulation, and consider how such models may be augmented to control for fixed costs, child-related work costs, preference heterogeneity and endogeneity in wages. We describe methods by which non-linear budget constraints may be accommodated in estimation, policy simulations and welfare analysis, and discuss how stochastic terms may be factored into the simulation of behavioural responses to a policy shock. Copyright 2002 by Blackwell Publishers Ltd

The economic value of a forested catchment with timber, water and carbon sequestration benefits

This paper examines the optimal management strategy for a forested catchment that yields timber, water and carbon sequestration benefits. The Faustmann multiple rotation model is extended to allow for the maximisation of the net present value of these timber and non-timber benefits. The model is applied to the Thomson Catchment in Central Gippsland, Victoria. Carbon sequestration benefits are modelled via total stand biomass accumulation. The cost of carbon release back into the atmosphere upon logging is estimated as a function of rotation age using an adjusted pulpwood/sawlog ratio. The allowance for both non-timber benefits is found to lengthen the optimal rotation, in a large range of cases to infinity.

Financing higher education and majority voting

Abstract This paper examines the state funding of higher education, treated as an investment good generating an externality, under majority voting. The model considers a single cohort over two periods. Individuals maximise net lifetime income subject to the governments budget constraint. With a proportional tax, cyclical voting does not occur despite double-peaked preferences. Comparative static results are obtained. A fall in non-education expenditure leads to a fall in the choice of grant and a positive externality is a necessary though not sufficient condition for ensuring majority support for some positive level of the grant.

Close Equals and Calculation of the Vertical, Horizontal and Reranking Effects of Taxation

This paper examines the Gini-based method of decomposing the redistributive effect of taxation into vertical, horizontal, and reranking components. The consequences of different bandwidth choices, used to identify close-equals groups to estimate the horizontal effect, are discussed. Two opposing forces are identified which militate against choosing a very small or large bandwidth. It is suggested that the best procedure is to use the bandwidth that maximises the estimated vertical component, compute the reranking component exactly as a sample statistic and obtain the horizontal effect by subtraction. The technique is used to analyse the progressivity of tax and transfer payments in Australia. Copyright 2001 by Blackwell Publishing Ltd

The Elasticity of Taxable Income

This paper provides an introduction to the concept of the elasticity of taxable income with respect to the net-of-tax rate. This elasticity aims to capture all potential responses to income taxation in a single elasticity measure, without the need to specify the nature of the various adjustment processes involved or consider the details of tax regulations. These adjustments include, as well as labour supply changes, income shifting between sources which are taxed at different rates, and tax evasion through non-declaration of income. The use of such a ‘reduced form’ approach has proved to be very attractive. The elasticity of taxable income has the added attraction that, under certain assumptions, it is sufficient to obtain a measure of the excess burden of income taxation. Emphasis is placed on the assumptions behind the approach.

Accounting for population ageing in tax microsimulation modelling by survey reweighting

This paper investigates the use of sample reweighting in a behavioural tax microsimulation model, to examine the implications for government taxes and expenditure of population ageing in Australia. First, a calibration approach to sample reweighting is described, producing new weights which achieve specified population totals for selected variables, subject to the constraint that there are minimal adjustments to the weights. Second, the performance of the Australian Bureau of Statistics’ (ABS) weights provided with the 2001 Survey of Income and Housing Cost (SIHC) was examined and it was found that reweighting does not improve the simulation outcomes for the 2001 situation, so the original ABS weights were retained for 2001. Third, the implications of changes in the age distribution of the population were examined, based on population projections to 2050. A ‘pure’ change in the age distribution was examined by keeping the aggregate population size fixed and changing only the relative frequencies in different age-gender groups. Finally, the effects of a policy change to benefit taper rates in Australia were compared for 2001 and 2050 population weights. It is suggested that this type of exercise provides an insight into the implications of changes in the population on government income tax revenue and social security expenditure, indicating likely pressures for policy changes.

Edgeworth and the development of neoclassical economics

Edgeworths life and work early work methods of ethics the economical calculus competition and the number of traders the utilitarian calculus further work on exchange and distribution taxation and international trade.

Measuring Welfare Changes and the Excess Burden of Taxation

This paper examines methods used to evaluate the welfare effects of tax changes, with emphasis on the measurement problems involved. Welfare changes and excess burdens are defined, along with approximations. Aggregate measures, using a social welfare function, are examined. The special case of income taxation is then examined, leading to discussion of the marginal welfare cost of taxation and the marginal cost of funds. The measurement methods examined include the use and estimation of direct and indirect utility functions, along with the algebraic and numerical integration from estimated Marshallian demand functions to the compensated demands. The use of equivalent incomes to examine tax changes, using unit record data from household budget surveys, is then discussed. Copyright 2000 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

MEASURING WELFARE CHANGES IN LABOUR SUPPLY MODELS

This paper examines the computation of welfare measures for use with labour supply models. The standard method of computing compensating and equivalent variations does not allow sufficiently for the nonlinearity of the budget constraint in such models. An alternative method is suggested and applied to contexts in which individuals are allowed to vary their hours continuously and to contexts where only a limited number of discrete hours of work are available. Discrete hours models have in recent years been used in view of the substantial econometric advantages when estimating the parameters of direct utility functions. This type of model is particularly popular in behavioural microsimulation modelling where predicted labour supply responses are calculated for policy changes.