Tax Module
PWBM's Tax Module functions as a microsimulation model featuring detailed tax calculators for individual income taxes, payroll taxes, corporate taxes, and estate taxes. The system simulates behavioral responses to tax policy changes and calculates effective tax rates used in PWBM's dynamic OLG model.
Overview
The model begins with representative samples of individual income tax and business tax returns containing more than one hundred variables on income sources, deductions, credits, and taxpayer characteristics. These returns are statistically matched with records from the Current Population Survey (CPS) and projected forward using forecasts from PWBM's microsimulation model (PWBMsim).
The Tax Module incorporates detailed tax calculators accounting for major elements of individual income taxes, payroll taxes, corporate taxes, and estate taxes. Simulated taxpayers optimize their taxes by choosing deductions and credits that minimize liability. They respond to tax policy changes by altering business entity type, reclassifying income sources, and shifting income realization timing.
The Tax Module produces reduced-form tax functions calibrating tax policy in PWBM's dynamic OLG model through effective tax rates and taxable income calculations. This approach allows incorporation of microsimulation detail into a structural model while respecting computational requirements.
Demographic Microsimulation Integration
The Tax Module backbone utilizes the IRS's Statistics of Income (SOI) Public Use File (PUF), an anonymized representative sample of tax returns with more than one hundred variables on income sources, deductions, credits, and demographic characteristics. Starting with 2012 PUF data updated through historical aging, the PUF undergoes statistical matching with Current Population Survey (CPS) data. This imputes non-tax demographic information to tax returns and provides data on non-filing populations. Demographic projections from PWBMsim forecast tax microdata into future years, adjusting sample weights as differential growth rates in subpopulations change the composition of the tax-filing population. The integration creates a consistent and unified framework for making revenue projections.
Individual and Payroll Taxes
The Tax Module includes detailed tax calculators for individual income and payroll taxes. These calculators encompass all major provisions of the relevant tax code, including income provisions, deductions, ordinary and preferred tax rates, the Alternative Minimum Tax, all credits, FICA, SECA, and others. The model parameterizes tax code elements with more than 300 tax parameters, covering tax rates, limitations on tax expenditures, and inflation indexing rules. Given baseline projections and the full set of tax parameters, the Tax Module produces a current-law projection of individual income tax and payroll tax liabilities for the entire population, including nonfilers in the case of payroll taxes.
Corporate and International Tax
PWBM uses aggregate SOI data to forecast business tax forms including 1120s and 1065, distinguishing entities by industry classification (NAICS codes) and firm size (total assets and business receipts). Corporate income tax is estimated using sub-aggregate data, with each model simulating a representative corporation's behavior. The corporate model forecasts usage of 15 investment classes with different depreciation schedules and models net operating loss usage limitations. Post-TCJA, the model calculates GILTI and FDII tax liabilities for multinational firms using OECD corporate income data and models profit-shifting incentives across jurisdictions.
Estate Taxes
The Tax Module features an estate tax calculator designed to project estate tax revenues under current law and policy proposals. Given the absence of publicly-available estate tax microdata, the model simulates estate-level data using wealth microdata from the Survey of Consumer Finances (SCF) and IRS summary tables. Mortality risk is simulated accounting for variations across age, gender, income, and marital status. The estate tax calculator encompasses all major Form 706 elements, including unlimited marital deduction, deceased spousal unused exclusion, and gift tax integration.
Micro-dynamic Behavioral Responses
The Tax Module accounts for certain behavioral responses under alternative policy counterfactuals. These responses are consistent with a traditional definition of "conventional" budget estimates and do not represent shifts in real economic activity, which are handled by PWBM's dynamic OLG model. Feedback responses include business income shifting across organizational forms (between C-corporate and pass-through firms), labor income reclassification (responding to differential tax rates on labor vs. capital income), and income shifting across time (capital gains realization elasticity of -0.66 based on empirical research).
Output
Supplied with alternative tax policy parameters, the Tax Module re-calculates tax liabilities and produces two versions: a purely static calculation where taxpayers don't alter behavior, and a second version allowing for micro-dynamic behavioral responses. The Tax Module produces three main types of outputs: fiscal year revenue projections aggregated from calendar year liabilities across individuals, businesses, and estates; distributional tables measuring tax unit impacts; and effective tax rate measures used by the dynamic OLG model.
Dynamic Integration
While the Tax Module is capable of incorporating certain conventional behavioral responses, it does not account for macroeconomic feedback effects on its own. The Tax Module holds real economic decisions fixed between scenarios. Its output feeds into PWBM's dynamic OLG model for simulating general equilibrium effects. Tax functions describe federal tax policy structures and the OLG model runs in "static" and "dynamic" modes, combining microsimulation detail with macroeconomic feedback effects.