A General Equilibrium Assessment of the 1973 United Kingdom Tax Reform

Abstract

Recent contributions to general equilibrium literature by Scarf (1967, 1973) have emphasized both computability of competitive equilibria and potential applications of constructive proofs of existence of competitive equilibria to issues of public policy. Computational techniques directed to these ends have been developed by Shoven and Whalley (1973), an earlier variant (Shoven and Whalley, 1972) being applied to a recalculation of Harberger's (1966) estimates of efficiency loss from differential taxation of income from capital in United States. These methods are applied in this paper to a particular set of policy measures grouped under heading of the 1973 UK tax reform. This group of tax changes has property of being discrete interdependent policy measures carried out at a single point in time from which significant variations in relative prices were to be anticipated. A general equilibrium framework would thus seem indispensable for a systematic evaluation of desirability of changes. No exposition of computational methods is given here, focus being interpretation of results and their relevance to public policy. The method of computing competitive equilibria in 21-dimensional space used in this application is somewhat technical and special features of model are used to bring execution time down within tolerable limits. (Excess demands to a tolerance of 2 x 109 are obtained within seven seconds of execution time on an IBM 360, largest demands at equilibrium exceeding 50,000 0.) The interested reader is referred to Whalley (1973, 1975a) and to Shoven (1973). The particular legal tax changes which are considered are (a) abolition of purchase tax; (b) abolition of selective employment tax (SET); (c) introduction of value-added tax (VAT) including additional tax on new cars; (d) change in system and rate of corporation tax; and (e) move to unified income tax. These changes do not correspond precisely to those introduced in 1973 budget. The United Kingdom before tax reform is represented by averaged data for period 1968-1970 (see Whalley, 1973, 1975b). Some correction is