The Empirical Analysis of Tax Reforms

Over the last decade increasing use has been made of individual household
data to analyse the gains and losses from tax reform. Much attention has
been paid to the econometric estimation of models of household responses to
taxes. But these models yield valid estimates of the welfare consequences
of tax changes only when the implied preference orderings are well behaved.
This paper discusses the nature of such conditions in detail. Where there
are rionlinearities in the budget constraint then two sets of "primal" and
"dual" conditions must be satisfied. The analysis of these conditions
yields suggestions for the specification of behavioural models and the use
of individual-specific information in the observed data.