IZA DP No. 4106: SWEtaxben: A Swedish Tax/Benefit Micro Simulation Model and an Evaluation of a Swedish Tax Reform
The purpose of SWEtaxben is to evaluate the impact of changes in the tax/benefit systems on households as well as the central governmental budget. Relating to the micro simulation literature this model can be labeled a static micro simulation model with behavioral changes. This behavioral change takes two different forms and use two different types of models; first binary models that describe mobility in/out from non-work states such as old age pension, disability, unemployment, long term sickness and second models that describe change in working hours and welfare participation. Thus, apart from the choice to work or not to work, working hours conditional on working as well as welfare participation are treated as endogenous variables. As an application the model is used to evaluate the recent Swedish "make work pay" reform, effective from 2007 and further reinforced in 2008 and 2009. The key characteristic of this reform is an in-work tax credit and decreased state tax rate. Simulations performed by SWEtaxben show increased working hours at both the intensive as well as extensive margin. The tax decrease together with dynamic changes results in a strong increase in household's incomes but also a reduction in income inequality. However, even considering the increase in hours of work, the reform is far from being self-financed.