Overview of the Tax Foundation's General Equilibrium Model, April 2018 Update V. 1

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1 Stephen J. Entin, et al., Overview of the Tax Foundation's General Equilibrium Model, April 2018 Update 1 (2018)

handle is hein.taxfoundation/ovwotetxfn0001 and id is 1 raw text is: Overview of the Tax Foundation's
in General Equilibrium Model
April 2018 Update
Stephen 1. Entin Huaqun Li Kyle Pomerleau
Senior Fellow Economist Director of Federal Projects
The Tax Foundation has developed a General Equilibrium Model to simulate the effects of
government tax and spending policies on the economy and on government revenues and
budgets. The model can produce both conventional and dynamic revenue estimates of tax policy.
The model can also produce estimates of how policies impact measures of economic
performance such as GDP, wages, employment, the capital stock, investment, consumption,
saving, and the trade deficit. Lastly, it can produce estimates of how different tax policy impact
the distribution of the federal tax burden. The model can analyze the effects of most types of tax
policy proposals. It can estimate the effects of changes to the rate and the base of the individual
income tax, the corporate income tax, payroll taxes, estate and gift taxes, excise taxes, and other
miscellaneous taxes.
The Tax Foundation model has three main components that work together to produce estimates.
The first component is a tax simulator. This component produces conventional revenue and
distributional estimates. The tax calculator also produces estimates of marginal tax rates on
different sources of personal and business income. The second component of the model is a
neoclassical production function. This component estimates long-run changes in the level of
output based on changes in the capital stock and labor force in response to policy. The last
component of the model is an allocation or demand function. This component estimates how tax
changes alter people's choices between labor and leisure. In addition, it takes estimates of
projected output from the production model and estimates how changes in income are allocated
between saving and consumption, and how the economy's wealth is allocated between physical
and financial capital. It predicts net exports and international capital flows, and the split of
financial capital between domestic and foreign assets.
The Tax Foundation model produces estimates of the long-run impact of tax policy as well as the
year-by-year path of the economic adjustment, and the impact of tax policy on the government
budget over the usual 10-year budget window.
1.0 The Tax Simulator
The starting point for Tax Foundation estimates is the output from the tax simulator. The tax
simulator includes a detailed individual income tax calculator and tax models for the corporate
income tax, payroll taxes, value-added taxes, excise taxes, the estate tax, and miscellaneous
taxes and fees. The tax model produces estimates of federal tax revenues, marginal and effective
tax rates, and the distribution of the tax burden. The model produces long-run revenue estimates
and annual estimates over a 10-year budget window.

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