Building a computable general equilibrium tax model for Italy

Abstract

ABSTRACTIn this paper, we develop a multi-sectoral computable general equilibrium tax model for Italy allowing for a number of fiscal tools. We illustrate the methodology for modelling and accommodating the full range of direct and indirect taxes into the national general equilibrium model. In particular, we build a commodity tax matrix by commodity, source, user and tax type; and a production tax matrix by industry and tax type. We also put a special emphasis on the institutional sector accounts, incorporating a detailed system of equations. Our model provides a powerful tool for acquiring new insights in fiscal policy analysis, through the assessment of tailored tax reforms, which can consist of either changes in tax rates and tax bases for indirect and direct taxes. Finally, to validate the model we perform an equalizing Value-Added-Tax rates reform. We find that a budget-neutral uniform tax rate reform would be GDP and welfare improving. However, results across agents and sectors vary.