Welfare Impacts of Equal Yield Tax Reforms in the UK Economy

Abstract:     
A multisectoral dynamic general equilibrium tax model with and without announcement effects for open and closed capital markets is used to evaluate efficiency gains and transitional effects from equal yield tax reforms for seven different taxes in the UK economy. Impacts of an unanticipated tax reform on investment, capital accumulation, output and employment are compared to those of anticipated tax reforms. Households, producers, traders, investors and the government are found to be more capable of adjusting their economic behaviour when tax announcements are made in advance. In equal yield tax experiments welfare gains up to 1.4 percent of base year GDP can occur by removing distortions in taxes. Welfare loss of up to 2.05 percent of it can happen if a less distortionary tax, such as the labour income tax is replaced by more distortionary taxes. These simulation results hold whether the capital markets are closed or open.

Keywords: Dynamic tax model, general equilibrium, welfare, UK economy

JEL Classifications: D5, E6, O4

Working Paper Series