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Some Macroeconomic Effects of Tax Reform and Indexing

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  • Patrick Grady
  • Donald R. Stephenson

Abstract

The period from 1971 to 1974 was one of fundamental change in the structure of the Canadian system of taxation. From the federal budget of June 18, 1971, which brought the long process of tax reform to a close, to the introduction of the personal income tax indexing scheme, the variety and magnitude of the changes in taxation provide a particularly fruitful period for fiscal policy research. In this paper we report upon and discuss the results of simulating a macroeconometric model that includes most of the tax reform measures and indexing. We propose to examine in some detail a number of questions arising from these changes. Generally, we are interested in the implications of tax reform and indexing for stabilization policy. More specifically, we explore two interesting questions relating to fiscal policy. First, "What has been the effect of the 1972 tax reforms and indexing on the yield and elasticity of the income tax system?" By comparing the estimated tax yield over the 1972-1978 period of the pre-reform system with that of the reformed system one can separate the effect of the changes in the structure from the effect on revenue of the current inflation under progressive taxation. In a like manner, the effect of indexing can be determined by comparing the estimated yield of an indexed with an unindexed tax system over the same period. The second question we ask is, "What has been the effect of tax reform and indexing on the built-in stability of the economy?" Here we look at a measure of built-in stability for the pre-tax reform system and for the post-tax reform system with and without indexing. In addition, we apply various expenditure shocks to the model both with and without the indexing scheme in operation. Related to this, we also administer to the model a direct price shock to ascertain the relative stabilizing properties of the various tax regimes under an imported or commodity inflation. The model we use in our analysis is an update
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Patrick Grady & Donald R. Stephenson, 1977. "Some Macroeconomic Effects of Tax Reform and Indexing," Canadian Journal of Economics, Canadian Economics Association, vol. 10(3), pages 378-392, August.
    • Handle: RePEc:cje:issued:v:10:y:1977:i:3:p:378-92
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    Cited by:

    1. Nowotny, Ewald, 1980. "Inflation and Taxation: Reviewing the Macroeconomic Issues," Journal of Economic Literature, American Economic Association, vol. 18(3), pages 1025-1049, September.
    2. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 107-147, January.
    3. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-633, November.
    4. Isabel Argimón & José Manuel González-Páramo, 1987. "Una medición de la rémora inflacionaria del IRPF: 1979-1985," Investigaciones Economicas, Fundación SEPI, vol. 11(2), pages 345-366, May.

    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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