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The efficiency gains of VAT, income tax, corporate tax and capital income tax reductions are evaluated in the dynamic CGE model DREAM.
The efficiency gains of VAT, income tax, corporate tax and capital income tax reductions are evaluated in the dynamic CGE model DREAM. The tax rates are reduced from 5% to 25%; the reduction is fully financed by lump sum taxation. The efficiency gains are calculated as the marginal and average efficiency gains defined as change in society welfare measured in kroner per kroner change in tax revenue. We find that a decrease of 5% results in marginal efficiency gains in the area of 9.49% to 22.94%. The reduction of the VAT increases the society welfare due to intertemporal redistribution of the households’ welfare. In the case of an income tax cut the society gain welfare because almost all-living and future households are better off. The reduction of the capital income result in a society welfare loss since both living and future households suffers welfare loss. However, the marginal efficiency gain is still positive since the reduction causes a tax revenue gain. In spite of the existence of the ” tax paradox” the society gain welfare by a reduction of the corporate tax. We argue that the chosen financing rule and the discount rate in the society welfare function heavily affects the measures of efficiency as well as the individual household’s welfare.