An evaluation of the redistributive effects of a tax reform in the Dominican Republic through microsimulation models with behavioral responses

Abstract

This paper employs microsimulation methods to assess redistributive effects of the implementation of two separate fiscal reforms in the Dominican Republic, one altering the personal income tax and another altering value added taxes. For the former, behavioral responses are estimated through a discrete choice labor supply model with formal and informal hour points in the choice set and through the calibration of elasticities of hours with respect to remuneration and with respect to non-labor income. For the latter, the AIDS model is employed to estimate price elasticities of 12 consumption groups. In both reform scenarios, results highlight the role of informal markets as a progressivity driver, as it serves as a tax burden mitigation mechanism for households in the poorest quintiles, allowing that, when all households are made worse-off after a tax reform, relative tax burdens remain progressive.