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Transition Strategies in Fundamental Tax Reform

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  • Christian Keuschnigg

    ()

  • Mirela Keuschnigg

    ()

Abstract

This paper discusses alternative transition strategies of moving towards an S-base cash-flow business tax. While the tax has attractive neutrality properties, moving from the current situation towards the new system often involves a stark trade-off between short-run losses and long-run gains. We evaluate several alternative transition strategies. The preferred strategy consists of instantaneous implementation, an 80% devaluation of historical tax depreciation claims, and transitory deficit financing for intertemporal tax smoothing. This policy prevents windfall gains or losses on old capital, avoids a negative impact on labor market performance and thereby prevents short-run income losses. Simulations with a calibrated model for Germany indicate that this transition policy induces strong investment driven growth and yields a 7% gain in GDP per capita and a reduction in the unemployment rate by 1.5 percentage points in the long-run.

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Bibliographic Info

Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2010 with number 2010-10.

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Length: 37 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:usg:dp2010:2010-10

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Keywords: Cash-flow tax; investment; unemployment; transition policy;

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References

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Citations

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Cited by:
  1. Christian Keuschnigg, 2011. "The Design of Capital Income Taxation: Reflections on the Mirrlees Review," Fiscal Studies, Institute for Fiscal Studies, vol. 32(3), pages 437-452, 09.
  2. Keuschnigg, Christian & Keuschnigg, Mirela, 2012. "Transition Strategies In Enacting Fundamental Tax Reform," National Tax Journal, National Tax Association, vol. 65(2), pages 357-85, June.
  3. Keuschnigg, Christian, 2011. "Intra- und intergenerative Gerechtigkeit in der Finanzpolitik," Economics Working Paper Series 1137, University of St. Gallen, School of Economics and Political Science.

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