Income Tax Reduction and the Quantification of Welfare Gains — An Applied General Equilibrium Analysis

Abstract

Recently a growing number of studies of the applied general equilibrium model type have been used to quantify and to simulate strategies in fiscal, economic and energy policy. In analyzing the impact of such programs on the total economy, models of the Keynesian type have lost their attraction. Their black box character with respect to the allocation mechanism of prices in the structure of production, sectored employment and income distribution makes it difficult to evaluate the outcome of the simulation. Some well-known studies of applied general equilibrium models used in evaluating fiscal policy measures are those by Shoven and Whalley (1972, 1973), Whalley (1975), Fullerton, King, Shoven, and Whalley (1981), Fullerton, Shoven, and Whalley (1983) and by Ginsburgh and Waelbroeck (1981). As a result of criticisms of these models, viz. the unrealistic assumptions on which these models are based, the restriction of perfectly competitive markets has been partially replaced by an assumption of imperfect competition. In addition, institutional conditioning factors are also considered (see Harris, 1985).