TY - JOUR TI - Combining Microsimulation and Numerical Maximization to Identify Optimal Tax-Transfer Rules AU - Colombino, U AU - Islam, N VL - 15 IS - 2 PY - 2022 DA - 2022/08/31 SP - 4-43 C1 - IJM 2022;15(2):4-43 DO - 10.34196/ijm.00261 UR - https://doi.org/10.34196/ijm.00261 AB - In this paper we propose a computational approach to empirical optimal taxation. We develop and estimate a microeconometric model that is run to simulate household labour supply decisions and the implied economic, fiscal and welfare effects. The microsimulation is embedded into a numerical optimization routine that identifies the tax-transfer rule that maximizes a social welfare function. We consider the class of tax-transfer rules where net available income is computed as a 4th degree polynomial transformation of taxable income plus a transfer. We present the results for six European countries: Germany, France, Italy, Luxembourg, Spain and the United Kingdom. For most values of the inequality aversion parameter k that characterizes the social welfare function, the optimized rules provide a higher social welfare than the current rule, with the exception of Luxembourg. The optimized tax-transfer rules are close to a Flat Tax plus a Universal Basic Income (or equivalently a Negative Income Tax). JF - IJM SN - 1747-5864 PB - International Journal of Microsimulation ER -