Altertax

This topic is more advanced -- the instructions assume that

you already have some RunGTAP experience.

Suppose you wish RunGTAP to simulate the effect of abolishing your countrys crippling 80% tax on imported wine-corks. Using the View..Base Data.. Tax Rates command you discover that the GTAP database shows the cork tax to be only 30%. Why ? Perhaps the constructors of the GTAP database overlooked this detail whilst completing their enormous task. Or, maybe the tax rate was 30% for the data base reference year, but has risen to 80% since then.

What can you do about this problem? An obvious possibility is to edit the database directly to reflect todays 80% rate. This turns out to be difficult to do. There are so many flows to edit, and you have to ensure that important adding-up conditions are not violated.

Antipodean seer Gerard Malcolm advocates another approach -- using the model itself to create a new database. A simulation is run where tax rates are shocked to their desired value and the updated post-simulation database is used for subsequent policy experiments.

Malcolm suggests using a special closure and a special parameter file to ensure that the rate-changing simulation left other cost and sales shares as little changed as possible. His closure fixes regional trade balances, whilst his parameter settings amount to Cobb-Douglas everywhere -- this keeps budget shares fixed.

The Tools..AlterTax command loads these special closure and parameter settings. Then, it is up to you to set new target tax rates. The Shocks page has been designed to make this easy -- see Shocks to tax rates and Valerie. Next solve the model, and use the View..Updated Data.. Tax Rates to check that your targets have been reached. If all is well, create a new version based on the post-simulation database. Version..New launches the New Version Wizard, which helps you do this.

Finally, dont forget to change back to your original closure and parameter settings for policy experiments.

There is a Technical Working Paper by Malcolm on the GTAP web site which explains the theory of AlterTax in more detail.

Advanced Notes

The Altertax closure holds DTBALR exogenous for all regions except one, and CGDSLACK exogenous for that one region (which can be any one). Hence the closure depends on the regional aggregation. RunGTAP has a way of manufacturing such a closure when a new version is created:

Whenever RunGTAP starts, or if the Version..Change or Version..New commands are used, RunGTAP checks that ALTERTAX.CLS exists in the new version directory. If not, RunGTAP adds to GTAP.CLP to create a new ALTERTAX.CLS in the version directory.

Whenever a simulation is run, if ALTERTAX.PRM does not exist, RunGTAP uses the ALTPAR module (if active) to create a new ALTERTAX.PRM in the version directory.

Warning: Previously, the convention was to exogenize DTBAL and SAVESLACK [instead of DTBALR and CGDSLACK]. Since RunGTAP only creates ALTERTAX.CLS if necessary, you may find that the previous Altertax closure is still being used. Edit the Altertax closure (and save it as ALTERTAX.CLS) to rectify this.

URL of this topic: www.copsmodels.com/webhelp/rungtap/hc_altertax.htm

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