Applying Tax Policy Models in Country Economic Work: Bangladesh, China, and India

Abstract

Three examples from the World Bank's country economic work show how models can complement general principles in guiding the design of a tax reform package. The Bangladesh model highlights the sensitivity of judgments about desirable tax bases to assumptions about the labor market and substitutability in production. The China model quantifies the losses from recommending a single rate value added tax when prices are controlled and public capital is freely provided to state enterprises. The India model shows what fiscal adjustment is consistent with tariff reductions undertaken to promote an outward-oriented development strategy. Most of the costs of constructing tax policy models are related to the need to establish a consistent data set and to calibrate the model in a way that allows its behavior to be consistent with what good economic analysis would lead one to expect.