ITEP Microsimulation Tax Model Overview
The ITEP Microsimulation Tax Model, developed in 1996, is a tool for calculating revenue yield and incidence, by income group, of federal, state and local taxes. The ITEP model is capable of calculating the impact of current tax law and tax change proposals on taxpayers and can also project potential revenue yields of tax law changes. The model is unique in its ability to produce analysis at the federal and state levels and to analyze income, consumption and property based taxes.
In computing its estimates, the ITEP model relies on one of the largest databases of tax returns and supplementary data in existence, encompassing close to three quarters of a million records. To forecast revenues and incidence, the model relies on government or other widely respected economic projections.
The ITEP model’s federal tax calculations are very similar to those produced by the congressional Joint Committee on Taxation, the U.S. Treasury Department and the Congressional Budget Office (although each of these four models differs in varying degrees as to how the results are presented). The ITEP model, however, adds state-by-state estimating capabilities not found in those government models.
Below is an outline of each area of the ITEP model and what its capabilities are:
The Personal Income Tax Model analyzes the revenue and incidence of current federal and state personal income taxes and amendment options including changes in:
Rates--including special rates on capital gains
Inclusion or exclusion of various types of income
Inclusion or exclusion of all federal and state adjustments
Exemption amounts and a broad variety of exemption types and, if relevant, phase-out methods
Standard deduction amounts and a broad variety of standard deduction types and phase-outs
Itemized deductions and deduction phase-outs
Credits, such as earned-income and child-care credits
The Consumption Tax Model analyzes the revenue yield and incidence of current sales and excise taxes. It also has the capacity to analyze the revenue and incidence implications of a broad range of base and rate changes in general sales taxes, special sales taxes, gasoline excise taxes and tobacco excise taxes. There are more than 250 base items available to amend in the model, reflecting, for example, sales tax base differences among states and possible changes that might occur.
The Property Tax Model analyzes revenue yield and incidence of current state and local property taxes. It can also analyze the revenue and incidence impacts of statewide policy changes in property tax--including the effect of circuit breakers, homestead exemptions, and rate and assessment caps.
The Corporate Income Tax Model analyzes revenue yield and incidence of current corporate income tax law, possible rate changes and certain base changes.
Local Taxes: The model can analyze the statewide revenue and incidence of aggregate local taxes (not, however, broken down by individual localities).
The ITEP model is a “microsimulation model.” That is, it works on a very large stratified sample of tax returns and other data, aged to the year being analyzed. This is the same kind of tax model used by the U.S. Treasury Department, the congressional Joint Committee on Taxation and the Congressional Budget Office. The ITEP model uses the following micro-data sets and aggregate data:
IRS 1988 Individual Public Use Tax File, Level III Sample; IRS Individual Public Use Tax Files; Current Population
Survey; Consumer Expenditure Survey; U.S. Census; American Community Survey.
Partial List of Aggregated Data Sources:
Miscellaneous IRS data; Congressional Budget Office and Joint Committee on Taxation forecasts; other economic data (Moody’s Economy.com, Commerce Department, WEFA); state tax department data; data on overall levels of consumption for specific goods (Commerce Department, Census of Services); state specific consumption and consumption tax data (Census data, Government Finances, data from state revenue departments); state specific property tax data (Govt. Finances, data from state revenue departments.); American Housing Survey; Census of Population Housing; and other sources.