Impact of Tax Reforms in Applied Models : Which Functional Forms Should Be Chosen for the Demand System? Theory and Application for Morocco

When researchers and policymakers conduct impact analyses of economic reforms, especiallyfiscal reforms, the specification of the household demand system becomes crucial. There is atrade-off between using demand systems simple to manipulate but less realistic and othersystems that are more realistic but often more complex and difficult to estimate or calibrate. Inthis paper, we compare the results from two different demand systems: a simple one, the Cobb-Douglas (CD), and a more complex one, the Constant Difference Elasticity (CDE). We developan hybrid method of estimation - calibration based on the estimation of the parameters andelasticities of a QUAIDS system and on the calibration of those of the CDE system using across-entropy approach. The estimates obtained are introduced into a micro-simulated partialequilibrium model to approximate the impact of the VAT reform on poverty measures inMorocco. We show that when the simulated shocks are moderate, the gain of using a CDEsystem instead of a CD system is marginal but, when these shocks are stronger, the differencesbecome significant and increase. Then the use of these models can lead to different results whenevaluating public policies and their impacts on poverty measures