There is a growing recognition among public finance economists of the inappropriateness of closed economy models for analyzing alternative U.S. tax policies. In response to this, this paper reports on four different external sector specifications for the Fullerton-Shoven-Whalley general equilibrium tax model of the U.S. The alternative formulations permit an assessment of their impact on model findings and provide the enhanced capability for analysis of tax policies which connect closely with foreign trade issues (such as a VAT). Results indicate that the different external sector formulations can substantially affect the model's findings. When the model permits international capital flows, the effect of a tax policy can be quite different from what a closed economy model would predict. Capital mobility substantially increases the efficiency gain implied by corporate tax integration, while it more than eliminates the efficiency advantage of moving from an income tax to a consumption tax (unless adjustments are made in the foreign tax credit). The sensitivity of the efficiency evaluation of domestic tax policies to the functioning of international capital markets suggests the need for further research to determine precisely how those markets operate.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
0919.
Length: Date of creation: Jun 1982 Date of revision: Handle: RePEc:nbr:nberwo:0919
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Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985.
"General Equilibrium Analysis of Tax Policies,"
NBER Chapters,
in: A General Equilibrium Model for Tax Policy Evaluation, pages 6-24
National Bureau of Economic Research, Inc.
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