$TITLE Model M31.GMS: Closed 2x2 Economy - Calibrating to a Existing Tax $ONTEXT Production Sectors Consumers Markets | X Y W | CONS ------------------------------------------------------ PX | 100 -100 | PY | 100 -100 | PW | 200 | -200 PL | -20 -60 | 80 PK | -60 -40 | 100 TAX | -20 0 | 20 ------------------------------------------------------ $OFFTEXT PARAMETERS TX Proportional output tax on sector X, TY Proportional output tax on sector Y, TLX Ad-valorem tax on labor inputs to X, TKX Ad-valorem tax on capital inputs to X; $ONTEXT $MODEL:M31 $SECTORS: X ! Activity level for sector X Y ! Activity level for sector Y W ! Activity level for sector W (Hicksian welfare index) $COMMODITIES: PX ! Price index for commodity X PY ! Price index for commodity Y PL ! Price index for primary factor L (net of tax) PK ! Price index for primary factor K PW ! Price index for welfare (expenditure function) $CONSUMERS: CONS ! Income level for consumer CONS $PROD:X s:1 O:PX Q:100 A:CONS T:TX I:PL Q: 20 P:2 A:CONS T:TLX I:PK Q: 60 A:CONS T:TKX $PROD:Y s:1 O:PY Q:100 A:CONS T:TY I:PL Q:60 I:PK Q:40 $PROD:W s:1 O:PW Q:200 I:PX Q:100 I:PY Q:100 $DEMAND:CONS D:PW Q:200 E:PL Q:80 E:PK Q:100 $OFFTEXT $SYSINCLUDE mpsgeset M31 PW.FX = 1; TX = 0; TY = 0; TLX = 1; TKX = 0; $INCLUDE M31.GEN SOLVE M31 USING MCP; * In the first counterfactual, we replace the tax on labor inputs * by a uniform tax on both factors: TLX = 0.25; TKX = 0.25; TX = 0; TY = 0; $INCLUDE M31.GEN SOLVE M31 USING MCP; * Now demonstrate that a 25% tax on all inputs is equivalent to a * 20% tax on the output (or all outputs if more than one) TLX = 0; TKX = 0; TX = 0.2; TY = 0; $INCLUDE M31.GEN SOLVE M31 USING MCP; * Finally, demonstrate that a 20% tax on the X sector output is * equivalent to a 25% subsidy on Y sector output (assumes that the * funds for the subsidy can be raised lump sum from the consumer!) TKX = 0; TLX = 0; TX = 0; TY = -0.25; $INCLUDE M31.GEN SOLVE M31 USING MCP;