Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

Econ00053 Economics of Tax Policy

Choosing a topic for your tax policy project (updated January 2023)

As part of Econ00053 Economics of Tax Policy, you will undertake the tax policy project in small groups of 3 students, looking at economic aspects of an actual or potential change in some aspect of the structure or rates of indirect taxation (eg a change to VAT or to one of the excise duties levied on certain commodities such as alcohol, tobacco or mineral oils). The precise topic should be selected by the group.

The project report should include two key elements:

1. An economic assessment of the case for and against the tax reform. In other words, using the economic theory and other analysis discussed in the lectures and readings you will discuss whether or not the tax policy measure is an improvement to the tax system, viewed from the perspective of economics.

2. Analysis of publicly-available economic data to shed light on some aspect of the tax reform being studied. In this document we will refer to this aspect of the report as the Data Analysis Component (DAC for short).

This document provides some advice about choosing a suitable topic for your tax policy project.

What is a suitable topic for a tax policy project?

Your tax policy project needs to be about something which gives you scope for two things:

1. You need to be able to write an interesting analysis of the economic aspects of your chosen tax reform, drawing on the ideas, economic theory, etc covered in the course.

2. Your DAC needs to use publicly-available economic data to make some calculations of your own, which will shed light on some aspect of the tax reform being studied. To meet the DAC requirement you must find some data, and show something with it that wasn’t originally shown by the data. 

In thinking about a suitable topic, you need to think, above all, about your DAC. What data is available, and what calculations will it permit you to do? You MUST include a DAC in your report, and if you can’t see how to do a DAC for the topic you are considering, you need to look for another reform to study.

The reason that we are restricting the choice of projects to a change to the structure of indirect taxation (sales taxes such as VAT or excises) is because suitable data is available for many countries, and can realistically be analysed in the time available. Analyses of tax reforms involving income taxes and company profits taxes generally require more complex models and data, and are unlikely to be good subjects for your tax policy report.

The availability of data is going to dictate what you can choose as a topic. This is a very familiar situation to researchers in applied economics. There are many interesting papers that we could write, if only the right data existed. Successful research requires a compromise between exciting research ideas and data availability, and this will be true of your tax policy project too.

The DAC doesn’t need to be very elaborate or complicated, but it does need to start with some publicly-available data, and to do a calculation with the data that (i) wasn’t originally the subject of the data, and (ii) shows something relevant to your tax policy project.

You may well find that there are published research papers or reports studying the tax reform that you plan to write about, and that these include all sorts of interesting data, tables, graphs and other research results. That’s fine, and you can make use of this material in writing your analysis of the reform (ie the contribution numbered 1 above). But reporting other peoples’ research findings does not count as your DAC.

To meet the DAC requirement you must find some data, and show something with it that wasn’t originally shown by the data.

This can be quite simple:

For example, you could choose as your topic a reform to the structure of a sales tax, so that the rate of tax on some commodity, or group of commodities, would be reduced or increased. For example, a number of EU countries have introduced a reduced rate of VAT for certain labour-intensive services, and you might analyse whether you think this is a good idea. Your DAC could be a calculation of how much VAT revenue would be lost if this was done in a particular country. Example 1 (at the end of this document) describes how you could do this, using data on the pattern of household spending, and information about country’s VAT rates on different spending items.

Another possibility is that you might ask how changing the rates of tax on some commodities might affect the income distribution in the country you are studying. For example, the UK VAT system “zero-rates” certain “necessities” such as food, while applying the standard 20% rate of VAT to other goods and services. It is often said that this is done to help poor households, and your DAC could try to work out what proportion of the benefit of zero-rating actually goes to poor households. Example 2 (at the end of this document) shows how you might do this, using data on the pattern of household spending across income groups.

Given the short amount  of time you have available for your tax policy project, you will need to limit the scope of your DAC, and the kinds of calculations described are certainly sufficient to meet the DAC requirement.

Where can I find data?

Many countries publish statistical reports containing data that could be the starting point for analyses such as Example 1 and Example 2 (at the end of this document). However, not every country publishes such data, and sometimes the published data is less useful because the published tables do not show the information we need. In selecting the subject for your tax policy project, you need to think of a tax reform to study, and to choose a country for which the data you need for your DAC is available.

The data should be available in a published set of tables. Most countries now publish statistical reports on the internet. Typing “Household Income and Expenditure Statistics” into Google, along with the name of a country, will sometimes lead you to the kind of statistical reports and data you need. For example, I spent half an hour trying this out, and quickly located relevant statistical publications for the UK, Australia, Israel, South Africa and Japan. Similar publications are available for a number of EU member states, and through Eurostat for the EU as a whole. But I also drew some blanks, countries where I couldn’t find any useable data. You’ll need to look for yourself to see what you can find.

Data is rarely available for every year, and most statistical publications, especially those based on surveys of households, appear with a considerable lag. You may need to use data for 2015 or even earlier to analyse a current reform, and that’s fine. Just bear in mind in your discussion of the results that things may have changed since the data was collected – in particular prices may have risen due to inflation - and you may need to adjust for this.

Some countries make available statistical tables, and also offer access to the underlying “micro-data” – in other words, a computer file of the data for each individual household on which the survey is based. Most economic research is now based on micro-data rather than the published tables, because there’s much more you can do with it. However, using micro-data involves substantial effort in setting up the data, and you do not have time for this. For your DAC you should not attempt to obtain or use micro-data. Stick to what you can do with the published statistical tables.

Likewise you should restrict your work for this project to analyses based on data which is publicly available. DO NOT, under any circumstances, contact government statistical offices or academic researchers to ask them to provide you with data or reports which are not in the public domain.

Some suggestions

What kinds of policy reforms might you think of studying? There are three broad possibilities:

· You could analyse the economic merits of a reform which has taken place. This could even be some time ago. For example, the UK introduced a 5 per cent VAT rate on domestic energy about 20 years ago, and this reform would be a perfectly acceptable subject for a tax policy report.

· You could analyse the effects of an actual policy that has been proposed or is currently being implemented. Thus, for example, France has recently started to implement a substantial rise in the rate of tax on diesel fuel, and this has been the subject of major public protests. You could analyse the case for and against this reform, and perhaps quantify the distributional effects.

· You could analyse the effects of a completely hypothetical reform.  You might, for example, think of a reform that is considered in the economic theory that we discuss in the course (eg imposing a uniform VAT rate rather than different rates on different goods), and then discuss both the theory and some results from your DAC.  Alternatively, you might take a reform that has been implemented in one country, and ask what its effects would be in another country for which you have data. Analysing a hypothetical reform will often give you more scope to write something interesting and original than analysing an actual reform or a real proposal.

This gives you a very wide set of options.

Among hypothetical or actual reforms for which a suitable DAC may well be possible (depending on data availability for a particular country), you could study

· the case for a uniform rate of VAT in countries which currently have multiple rates

· the case for greater rate differentiation of VAT, adding, for example, a higher rate for certain goods, or adding more goods to the reduced rate band

· effects of higher taxes on motor fuels

· effects of taxes on domestic energy

· effects of a carbon tax (tax on energy in proportion to the carbon content of different fuels)

· reduced taxes on labour-intensive services

· reduced (or increased) taxes on restaurant meals and/or take-away food

· higher taxes on inputs to DIY activity (eg paint etc for home decorating)

· effects of taxes (or abolishing taxes) on public transport

· higher taxes on cigarettes: revenue effect, distributional effects, etc

· higher taxes on foodstuffs containing large amounts of fat, or sugar

· a higher tax on meat

· etc…

Example 1.  Estimating the change in VAT revenue that would result from increasing (or reducing) the rate of VAT on a particular commodity.

Sometimes countries publish estimates (eg as part of National Accounts data) of total consumer spending on a particular category (eg food, or public transport, or domestic energy, or petrol). It would then be straightforward to estimate the change in VAT revenue, by simply multiplying this spending by the relevant VAT rate change.

More often, surveys of consumer spending give information about the pattern of household spending, based on a sample of households. The spending categories in these surveys are usually much more detailed than spending data in National Accounts. Typically the published results from this type of survey will show either average household spending on each category (eg in £ per week), or the budget share of each category (ie the proportion of a household’s spending which is devoted to each item). In either form, these spending data for the average household can be used to make a rough-and-ready estimate of the revenue loss or gain from changing the rate of tax on some particular commodity.

You might then be able to find published estimates of the price elasticity of demand for the goods concerned (eg by searching economic journals such as Applied Economics for relevant research papers), which would allow you to calculate how the additional revenue might be reduced by the changes in consumption of the good(s) that would be induced by the tax change. Even if you cannot find published estimates of the price elasticity, you could think what a range of reasonable values for the price elasticity might be, and use some assumed elasticities to illustrate the range of possible effects on revenue.

(Often, but not always, household budget survey reports also include tables showing average household spending on different items across quintile or decile groups of household incomes. Then you could also calculate the additional revenue that would be contributed by households in different income groups.)

Example 2.  Estimating the distribution of the benefit conferred by “zero-rating” food or other items within a VAT system.

You have already done an exercise of this sort, using UK data, as part of the coursework for Class 2. Doing a similar analysis, perhaps for different commodities or for a different country, would be the basis of a good DAC section in your report.

The starting point is household budget survey data showing average household spending by households in different decile groups of household incomes. As you will have seen in te tutorial class, this can then be used to estimate the proportion of the benefit from zero-rating going to households at different levels of income. Essentially you would be repeating the method used in the Mexican study reported by the IMF, and shown in this diagram: