Note that the ratio numbers 0.50, 0.66 and 0.76 by themselves mean little. In both cases B is set at half W, so the value of B is not affected. The only point is that the bases are different each time, and apparently smaller. These bases of course change again for other assumptions on the various variables and functions. Where there is no difference at a particular moment (base year), there however arise differences over time. The following tries to find out more about this.
Progression factor
One way to trace developments over time is to make plots as we did in Book III. Another approach is more formally, and a commonly used route here is the assumption of a constant macro-economic progression factor. This factor is the elasticity of tax revenue with respect to income (Koopmans (1975:103)), thus mepf = (Y / TAX) (
TAX /
Y). The factor is determined by tax parameters, their indexation, the income distribution and its change. In this case, without a deficit, the progression factor applies to expenditure too, which may be taken to mean, effectively, that taxes are indexed such that tax revenue follows expenditure.
We shall take the progression factor for the average wage, which is exclusive of profits and the growth of employment. Thus our
= (W / g) (