Simulating Business Cash Flow Taxation

This paper uses the Global Gaidar Model (GGM) to simulate replacing a territorial corporate income tax with a wealth tax imposed in the form of a destination-based Business Cash Flow Tax (BCFT). The specific BCFT reform considered is the “BetterWay” Tax, a proposed but never enacted corporate-income tax reform. The GGM model is a 90-period OLG model, featuring 17 regions that collectively encompass the global economy. It is carefully calibrated to IMF fiscal data and the UN's region-specific fertility and mortality estimates and projections. According to the model, the BW plan produces, over a decade, increases in the capital stock, GDP, and pre-tax wages for high- and low- skilled workers of 20.5 percent, 6.8 percent, 6.3 and 7.5 percent, respectively. Over time, the capital stock and wage rates remain significantly above their baseline values. There is a smaller long-run increase in GDP as workers spend some of their higher wages on additional leisure. Despite this, the initially revenue neutral tax reform raises enough additional revenue over time to permit a reduction in personal income tax rates. This result is not predicated on unrealistic labor supply behavior. Rather it is caused by the reform's significant decrease in the marginal effective tax on U.S. investment, which induces a large influx of capital to the U.S. The main beneficiaries of the reform are today's and tomorrow's workers. We also simulate retaliatory cuts in foreign effective marginal corporate tax rates. This changes our results, but not by much. The reasons are two. First, the relative incentive to invest in the U.S. still rises dramatically. Second, Americans, who own a disproportionate amount of oversees assets, benefit disproportionately from the reduced global taxation of asset income.