A Microsimulation Modell for the Analysis of Revenue and Distributional Effects of Tax Reform Options

The microsimulation model ZEW TaxCoMM which was developed in cooperation with the University of Mannheim allows for the coherent micro-based analysis of revenue implications of tax reforms and the distribution of tax consequences across heterogeneous firms. In this regard, ZEW TaxCoMM constitutes an ideal supplement to the well-established models to determine effective tax burdens - the Devereux & Griffith Model and the European Tax Analyzer - which focus on a hypothetical investment or exemplary firms and derive the incentives of taxation.

Microsimulation models, by definition, trace or simulate all analytically relevant processes and interdependencies at the lowest level of aggregation. In case of ZEW TaxCoMM this is accomplished by deriving the company tax base from financial accounting data of German corporations taken from the DAFNE database provided by Bureau van Dijk.

Within the model the tax base is determined endogenously through a bottom up approach taking the applicable tax provisions into account. Hence, the model allows for a highly detailed simulation of firm specific tax assessment. As a consequence, distributional effects of tax reform options may be determined and analyzed with respect to firm specific characteristics. By way of aggregating the results, the revenue effects may be derived in addition. This allows for a profound analysis of tax reform options. Moreover, empirical tax elasticities on major firm decision margins have been implemented to simulate behavioural responses.

So far, ZEW TaxCoMM has been applied in order to analyze the impact of tax rate cut cum base broadening reforms as the company tax reform that was carried out in 2008. Further applications include an impact assessment of a CCTB for the EU and of an allowance for corporate equity regime.