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Transition Strategies In Enacting Fundamental Tax Reform

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  • Keuschnigg, Christian
  • Keuschnigg, Mirela

Abstract

This paper discusses transition strategies that might be used in moving from an income tax to consumption based business taxes in the form of an R-base cash-flow tax, an R+F-base tax, or an ACE (allowance for corporate equity) tax. While these three taxes have attractive neutrality properties, moving from the status quo to a new system often involves a difficult trade-off between short-run losses and longrun gains. We consider two alternative ways of spreading the gains and costs of reform more evenly across generations. Deficit financing of the large revenue loss that occurs immediately after reform allows the smoothing of wage tax rates over time and the elimination or reduction of short-run income losses. Alternatively, a system of delayed deductions requires firms to carry forward with interest some of the large deductions that are newly available after the enactment of a major tax reform. In shifting tax revenue from the future to the present, such policies are politically appealing, as they trade somewhat reduced future income gains for improved economic performance immediately after reform.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 65 (2012)
Issue (Month): 2 (June)
Pages: 357-85

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Handle: RePEc:ntj:journl:v:65:y:2012:i:2:p:357-85

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  1. John W. Diamond & George R. Zodrow, 2007. "Economic Effects of a Personal Capital-Income Tax Add-On to a Flat Tax," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 63(3), pages 374-395, September.
  2. Gravelle, Jane G, 1991. "Income, Consumption, and Wage Taxation in a Life-Cycle Model: Separating Efficiency from Redistribution," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 985-95, September.
  3. Christian Keuschnigg, 1990. "The Transition to a Cash Flow Income Tax," Discussion Paper Serie A, University of Bonn, Germany 276, University of Bonn, Germany.
  4. Christian Keuschnigg, 2008. "Exports, foreign direct investment, and the costs of corporate taxation," International Tax and Public Finance, Springer, Springer, vol. 15(4), pages 460-477, August.
  5. Auerbach, Alan J & Kotlikoff, Laurence J & Skinner, Jonathan, 1983. "The Efficiency Gains from Dynamic Tax Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 81-100, February.
  6. Christian Keuschnigg & Mirela Keuschnigg, 2010. "Transition Strategies in Fundamental Tax Reform," University of St. Gallen Department of Economics working paper series 2010, Department of Economics, University of St. Gallen 2010-10, Department of Economics, University of St. Gallen.
  7. Johannes Becker & Clemens Fuest, 2005. "Does Germany collect revenue from taxing the normal return to capital?," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 26(4), pages 491-511, December.
  8. Steve Bond & Michael Devereux, 1993. "On the design of a neutral business tax under uncertainty," IFS Working Papers, Institute for Fiscal Studies W93/01, Institute for Fiscal Studies.
  9. Feldstein, Martin, 1976. "On the theory of tax reform," Journal of Public Economics, Elsevier, Elsevier, vol. 6(1-2), pages 77-104.
  10. Keuschnigg, Christian, 1994. "Dynamic tax incidence and intergenerationally neutral reform," European Economic Review, Elsevier, Elsevier, vol. 38(2), pages 343-366, February.
  11. Doina Maria Radulescu & Michael Stimmelmayr, 2007. "ACE versus CBIT: Which is Better for Investment and Welfare?," CESifo Economic Studies, CESifo, CESifo, vol. 53(2), pages 294-328, June.
  12. Sarkar, Shounak & Zodrow, George R., 1993. "Transitional Issues in Moving to a Direct Consumption Tax," National Tax Journal, National Tax Association, National Tax Association, vol. 46(3), pages 359-76, September.
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Cited by:
  1. Leoš Vítek, 2013. "Corporate Income Taxation and the Corporate Tax Base in the Czech Republic," Český finanční a účetní časopis, University of Economics, Prague, University of Economics, Prague, vol. 2013(2).

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