Tax modelling

This paper reviews several alternative approaches to tax modelling, emphasi zing the strengths and limitations of different approaches and types of mod el along with their potential role in rational policy analysis. The coverag e is limited to models of personal direct and indirect taxes. A range of sm all models is considered, in which there is little population heterogeneity , and tax structures are relatively simple. Larger microsimulation models, which are based on cross-sectional data sets and which attempt to capture m uch of the complexity of actual tax structures, are then discussed. The cha llenge presented by the need for behavioural models is examined. It is argu ed that there is a role for a variety of alternative models. Policy debates inevitably involve prejudices, much rhetoric and special pleading. Rationa l policy analysis, in which the implications of adopting a range of explici t value judgements are examined, can make a valuable contribution to such d ebates.