Dynamic simulation of taxes and welfare benefits by database imputation

Summary

This paper proposes a new method for describing a realistic tax-benefit system in a dynamic microsimulation model. The suggested approach draws upon existing third-party tax-benefit calculators and provides an alternative to integration of tax functions within a dynamic structure. It has the advantages of adapting to the degree of household sector detail described by a model and permits taxes and benefits to be imputed directly from commonly available micro-data sources. A practical application to a dynamic programming model designed to reflect the contemporary UK policy context indicates that the proposed method for projecting taxes and benefits implies a comparable computational burden and generates qualitatively comparable results to a detailed functional description of fiscal policy, while simplifying model development.