A CGE Analysis of the Danish 1993 Tax Reform

The structural effects of the Danish tax reform of 1993 are evaluated using DREAM, a dynamic CGE model of the Danish economy featuring overlapping generations of agents who have perfect foresight. The tax reform implied a reduction in the tax burden and the progressivity of the labor income taxation, an introduction of "green" taxes as revenue raising instrument and a restructuring of the capital income taxation. We find that the overall macroeconomic effects of the total reform are limited, but that the accumulation of wealth in the private sector is stimulated, which generates a long run increase in aggregate consumption. Analyzing the three parts of the reform separately reveals that the small net effect of the reform is due to counteracting forces of each of the parts. The reform is a strict Pareto improvement - given the initial calibration of the model - in the sense that all generations are better off after the reform.