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Corporate Taxation and the Efficiency Gains of the 1986 Tax Reform Act

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  • Jane G. Gravelle
  • Laurence J. Kotlikoff

Abstract

The 1986 Tax Reform Act, while having little effect on the overall effective tax rate on U.S. capital income, did reduce significantly the difference in effective taxation of corporate and noncorporate capital within a number of U.S. industries. The Mutual Production Model developed in Gravelle and Kotlikoff (1989) can be used to study the efficiency gains from the reduction in corporate tax wedges within industries. Unlike the Harberger Model, the Mutual Production Model permits both corporate and noncorporate firms to produce the same goods and, therefore, to coexist within a given industry. This paper develops an 11 industry - 55 year dynamic life cycle version of the Mutual Production Model. We use this model to study the steady state efficiency gains associated with the new law. While we do not simulate the economy's transition path, our steady state welfare changes are those that arise from compensating transitional generations for the first order redistribution of income associated with the Tax Reform. We find that the 1986 Tax Reform law reduces excess burden by .85 percent of our model's economy's present value of consumption. This efficiency gain reflects the Tax Reform's reduction in corporate non-corporate tax wedges, particularly in those industries with significant non-corporate production. Measured as a flow the 1988 estimated efficiency gain from the Tax Reform Act is $31 billion.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3142.

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Date of creation: Oct 1989
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Publication status: Published as "Equity Effects of the Tax Reform Act of 1986", The Journal of Economic Perspectives, Vol. 6,no. 1 (1992): 27-44.
Handle: RePEc:nbr:nberwo:3142

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Cited by:
  1. Fehr, Hans, 1999. "Welfare Effects of Dynamic Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 5, number urn:isbn:9783161470165, July.
  2. Finn E. Kydland & Edward C. Prescott, 1996. "The Computational Experiment: An Econometric Tool," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 69-85, Winter.
  3. Gravelle, Jane G., 1995. "The Corporate Income Tax: Economic Issues and Policy Options," National Tax Journal, National Tax Association, vol. 48(2), pages 267-77, June.
  4. Skinner, Jonathan, 1996. "The dynamic efficiency cost of not taxing housing," Journal of Public Economics, Elsevier, vol. 59(3), pages 397-417, March.
  5. Meh, Césaire A., 2008. "Business risk, credit constraints, and corporate taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2971-3008, September.

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