Abstract
We use new representative data on Belgian taxpayers to assess behavioural responses to marginal reform scenarios entailing changes in tax rates and in the thresholds of taxable income brackets. The Belgian arithmetic microsimulation model (Beamm), a new tool for fiscal policy simulation, is employed to compute individuals’ disposable income after taxes as well as overall tax revenue. Labour adjustments in response to tax changes are estimated using a Random Utility Random Opportunity (RURO) model, and welfare effects are evaluated through money metric utility. We identify optimal directional tax reforms using a ratio of welfare change per euro change in tax revenue, such that in reforms that reduce tax revenue, the highest ratio corresponds to the greatest welfare gain, and vice versa. Our results show that optimal directional changes are a decrease in all bracket thresholds for tax-increasing reforms, and their increase for tax-decreasing reforms.