Computation of the Compensating Variation Within a Random Utility Model Using GAUSS Software

Abstract

To evaluate a tax reform in terms of change in household welfare one possibility is to estimate the compensating variation using a suitable model to assess the change in the household utility. When a random utility model is used, the computation of compensating variation is not straightforward, particularly when utility is not linear in household income. It can be carried out using a methodology recently proposed in the literature. In this paper, we describe a software instrument, implemented using GAUSS programming language for computing the compensating variation to evaluate the 1991 tax reform introduced in Norway. The program is flexible and adaptable to different tax systems and different reference years.