Applying Tax Policy Models in Country Economic Work: Bangladesh, China, and India

Three examples from the World Bank's country economic work showhow models can complement general principles in guiding thedesign of a tax reform package. The Bangladesh model highlightsthe sensitivity of judgments about desirable tax bases to assumptionsabout the labor market and substitutability in production. TheChina model quantifies the losses from recommending a singlerate value added tax when prices are controlled and public capitalis freely provided to state enterprises. The India model showswhat fiscal adjustment is consistent with tariff reductionsundertaken to promote an outward-oriented development strategy.Most of the costs of constructing tax policy models are relatedto the need to establish a consistent data set and to calibratethe model in a way that allows its behavior to be consistentwith what good economic analysis would lead one to expect.