EVALUATING THE INCOME REDISTRIBUTION EFFECTS OF TAX REFORMS IN DISCRETE HOURS MODELS

Abstract

Recent studies have examined tax policy issues using labour supply models characterised by a discretised budget set. Microsimulation modelling using a discrete hours approach is probabilistic. This makes analysis of the distribution of income difficult as even for a small sample with a modest range of labour supply points the range of possible labour supply combinations over the sample is extremely large. This paper proposes a method of approximating measures of income distribution and compares the performance of this method to alternative approaches in a microsimulation context. In this approach a pseudo income distribution is constructed, which uses the probability of a particular labour s..