Changes in the Czech Tax-benefit System: Long-run Effects (with V. Jacina)

We provide a methodological overview of the framework for assessing the long-run impact of the changes in tax-benefit system. The framework has three related building blocks. The first one is a microsimulation tool of the tax-benefit system which accounts for most of the taxes and benefits featured in the Czech welfare system. The second block employs the output of microsimulation tool to estimate consequent change in the labour supply of the individuals. It is a structural probit model which assigns probability of participation in the labour market to individuals based on their socio-demographic characteristics, wage, and non-labour income. The third block is a simple general equilibrium model where it is possible to model long-run macroeconomic relationships between gross domestic product, gross wage bill, net disposable income of households, and other macroeconomic indicators. Although we do not explicitly compute distributional impact of the simulated scenarios, the framework could be easily extended in this direction.