84th International Atlantic Economic Conference

October 05 - 08, 2017 | Montreal, Canada

General equilibrium model and tax policy

Saturday, 7 October 2017: 4:45 PM
Chonlakan Benjasak, MA , Business School, University of Hull, Hull HU6 7RX, United Kingdom
This paper presents the impacts of reform in the overall and sectoral tax structure in the Thai economy, specifically the change in value added tax (VAT). Our model was calibrated to the micro consistent benchmark data set contained in the Input-Output Table published in 2010 by the Office of National Economics and Social Development Board (NESD) with some restructure into 18 sectors. The general algebraic modelling system (GAMS) was used to estimate the parameters of the model. The 18 sector input-output model for Thailand in this study can be constructed with a standard Leontief (1949) model similar to Bhattarai (2007) and Liu et al (2012).

The result demonstrates that an increase in VAT from 7 to 10 percent generates an increase in public welfare and decrease in household utility. In addition, this policy leads to an increase in prices and decrease in outputs in many sectors. At the same time, it has a favorable effect on some sectors that cause an increase in both output and prices. For energy sectors, only output in other petroleum product sectors increases, whereas the prices in petroleum refineries and electricity sectors increase. The elimination of VAT enhances economic growth in almost all sectors, especially in the petroleum refineries sector, agriculture sector, and petroleum and natural gas sector, relative to the benchmark case. Furthermore, zero percent VAT increases the price of capital in all sectors by 0.0060 percent. Although this policy accelerates household utility, it reduces public welfare.

The advantage of an input-output table is it represents a snapshot of the economy at one point in time that one can use to develop models to evaluate the change in economy or the impact of policy such as Bergman (1990), Semboja (1994), Xie et al (2000), Dellink et al (2004), Bhattarai (2007, 2011, 2016), and Ruamsuke et al (2015). However, input-output tables have two main assumptions: fixed technical coefficients, and fixed input proportions. Therefore, they are suitable for explaining the current situation and making short-term predictions for the economy.

Keywords: General Equilibrium, Tax Policy, VAT, Thailand