An Applied General Equilibrium Model to Assess the Impact of National Tax Changes on a Regional Economy

This paper presents two versions of an applied general equilibrium model for the regional economy of Andalusia, Spain, that differ in the closure rule adopted to describe the behavior of the public sector. We use the model with to analyze the impact that the reform of the personal income tax (Act 40/98) implemented in Spain as a whole would have had on the Andalusian region in particular. The model is of the neoclassical variety and includes not only the productive sectors of the economy but also the foreign sector and the government, which are usually absent from theoretical general equilibrium models. Both versions of the model are calibrated by using a Social Accounting Matrix of Andalusia for 1995. The analysis shows that the reform is not self-financing, not even partially, despite governmental claims. It also indicates that there is a positive but smaller than anticipated economic stimulus. In welfare terms, we find that the category of Urban Salaried consumers is the one that benefits the most in real income terms.