In March 2022, we announced the launch of our new dynamic tax model. Built in collaboration with economic consultants Europe Economics, the model predicts the dynamic impact of tax changes on the economy and wages; using official data from the Office for Budget Responsibility (among others).
TPA research director Duncan Simpson explains the dynamic tax model
Ahead of the 2022 Spring Statement, we used to model to predict that the health and social care levy could result in the UK economy being £24 billion smaller over ten years.
The dynamic tax model has also been used to estimate the growth impacts of cutting taxes including fuel duty and income tax, and has been featured in The Sun, The Daily Mail, BBC and GB News.
Moving forward, the model will be used by the TPA research team to forecast the results of future tax changes. As with any model which relies on estimates, the numbers won't be perfect; but they will give a clear indication as to whether tax changes could help or hinder growth or wages in the medium to long term.
Dynamic Tax Modelling - Frequently Asked Questions
What is it?
The model predicts the dynamic impact of tax changes on the economy and wages. Most of the modelling of tax changes only looks at how much HMT will bring in. Yet this static approach often does not reflect what happens in the real-world economy. It is based on the Ramsey-Cass-Koopmans model. This is similar to the CGE (Computable General Equilibrium) modelling, which the government has used to map the impact of cuts in corporation tax and fuel duty.
How does it work?
It uses official data from the Office for Budget Responsibility among others, to calculate the aggregate impact of tax changes. It then uses data from a previous ten year period, between the financial crash and covid pandemic, to project this forward. The numbers won't be perfect, as after all they are estimates obtained from an economic model. But they will give a clear indication as to whether tax changes could help or hinder growth or wages.
Who designed it?
It is the result of a collaboration between economic consultants Europe Economics and think tank the TaxPayers' Alliance.