A model of tax reform for Belgium

Abstract

The paper deals with determining second-best optima and existence conditions of ‘Pareto Improving Directions’ of tax reform for an economy experiencing Keynesian unemployment (i.e. characterised by excess supply of labour and commodities). It is then tested whether these existence conditions were fulfilled in Belgium in 1982. The model considers the taxation of seven consumption goods plus labour in a ten-consumer economy. Empirical evidence suggests that welfare improving price directions can be found. The whole set of these directions is then constructed.