Reports 2013/03

LOTTE-Konsum - a microsimulation model for distributional effects of indirect taxes

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While direct taxes affect income distribution directly, indirect taxes also have distributional effects. A high tax on commodities consumed relatively more by low-income households will affect those households relatively more than high-income households. On the other hand, high-income households will be more affected by tax increases on goods of which they consume relatively more, e.g. different types of luxury goods. The main purpose of the microsimulation model LOTTE-Konsum is to describe such redistributional effects of changes in indirect taxes.

The model is linked to the tax-benefit model LOTTE-Skatt. This makes it possible to study the distributional effects of simultaneous changes in indirect and direct taxes, or comparing distributional effects of changes in indirect taxes with changes in direct taxes.

LOTTE-Konsum has numerous applications, and we present some examples in this report. Among other things, we use the model to show how reducing tax on food is more equalizing than reducing tax on wine. Moreover, we compare these two tax changes with increasing the child benefit, and find that the latter is the most effective means of equalizing living standards.

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