A Dynamic Micro-Econometric Simulation Model for Firms

Abstract

The firm-based simulation model presented in this paper aims to help practical policy making, by providing a tool for analyzing the behavioural effects induced by changes in the tax code and for forecasting corporate tax revenues. To achieve this end, one of the key innovations adopted in the paper is the use of robust estimation techniques designed to ameliorate the undue impact of influential observations. The simulation results indicate that a statutory corporate tax rate reduction does not reduce the effective corporate tax rate to an equal extent because firms adjust their behaviour to new tax rules. The simulation also reveals that even though the macroeconomic environment is important for the taxes paid by the firm, it is not obvious that the effective tax rate for these firms may change because of the changed macro conditions.