Analyzing tax reforms using the Swedish Labour Income Microsimulation Model

Labour income taxation is a central policy topic because labour income makes up the majority of national income and most taxes are in the end taxes on labour. In order to quantify how behavioural responses of labour income earners a ect tax revenue, the Swedish Labour Income Microsimulation Model (SLIMM) is constructed and used to evaluate tax reforms. The model simulates taxable income responses, participation responses and income e ects. Elasticities are calibrated to match midpoints of estimates found in the quasiexperimental literature. SLIMM is solidly microfounded and uses administrative register data. The model is used to analyze changes to the earned income tax credit (EITC), municipal income taxes and the central government income tax paid by high-income earners. The simulations indicate that the EITC has increased employment by 128,000 and has a degree of selfnancing of 21 percent. Almost half of the revenue increase from higher municipal tax rates would disappear due to behavioural responses. Tax cuts for the richest fth of working Swedes are completely selfnancing. ∗Department of Economics and Uppsala Center for Fiscal Studies, Uppsala University. I thank Spencer Bastani, Per Engström, Johan Fall, Lennart Flood, Dan Johansson, Johanna McElwee, Katarina Nordblom, Håkan Selin, Mikael Stenkula, Helena Svaleryd and seminar participants at the Department of Economics, Uppsala University, for helpful comments and discussions. I am also grateful to Katarina Johansson and Daniel Kruse at Statistics Sweden for data assistance. Financial support from the Jan Wallander and Tom Hedelius Foundation is gratefully acknowledged.