Setting Behavioral Responses in PWBM’s Dynamic Simulations — Penn Wharton Budget Model

* A literature survey is provided for the key behavioral parameters in tax analysis: labor supply elasticity; saving elasticity and openness to international capital flows. o Tax changes affect after-tax wages. The labor supply elasticity  parameter controls the simulator’s labor supply response to changes in after-tax wages. o Tax changes also affect net-of-tax interest, dividend, and capital gains. The saving elasticity parameter controls how much national saving increases in response to changes in after-tax asset returns. o The openness to international capital flows parameter controls the share of new issues of U.S. financial assets that foreign savers purchase. A larger share means greater insulation of domestic investment from variation in domestic saving. * However, enough uncertainty exists regarding these key parameters, and so the PWBM model allows the user to try different values.