Tax Module

Download a white paper detailing data processing for PWBM’s Tax Module.

PWBM’s Tax Module is a microsimulation model with detailed tax calculators for individual income taxes, payroll taxes, corporate taxes, and estate taxes. It simulates behavioral responses to tax policy changes, and calculates effective tax rates used in PWBM’s dynamic OLG model.

We begin with representative samples of individual income tax and business tax returns, which provide more than one hundred variables on income sources, deductions, credits, and other taxpayer characteristics. These returns are statistically matched with records from the Current Population Survey (CPS) and are projected forward in accordance with forecasts from PWBM’s microsimulation model (PWBMsim). This process informs how the population of tax units evolves over time, accounting for changes in demographics and incomes.

The Tax Module incorporates detailed tax calculators that account for all major elements of individual income taxes, payroll taxes, corporate taxes, and estate taxes. Simulated taxpayers optimize their taxes, choosing deductions and credits that minimize liability. They also respond to tax policy changes where possible: by changing business entity type (for example from pass-through to C corporation); by reclassifying labor income as capital income; and by shifting income realization across time.

Finally, the Tax Module produces reduced-form tax functions used to calibrate and describe tax policy in PWBM’s dynamic OLG model. These functions, which consist of effective tax rates and taxable income calculations, allow PWBM to incorporate the rich detail of microsimulation into a structural model, where computational limits require a simplified representation of tax policy. The result is a unified model that allows for both conventional and dynamic scoring.