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How much can corporate tax reduction contribute to economic recovery, employment and feedback of tax revenue?

  • Kazuki Hiraga

    (Faculty of Economics, Keio University)

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    Recently, discussion of corporate tax reduction is hot political issue in Japan. Especially, some researchers and politicians insist on the reduction of corporate tax rate, following the fact of "Corporate tax paradox", which means that corporate tax revenue per Gross Domestic Product (GDP) has a negative correlation with effective corporate tax rate. However, quantitative effect of corporate tax reduction is unclear and the discussion of finance methods does not proceed. Therefore, we examine the quantitative effect of corporate tax reduction to employment, output and total tax revenue which is the cost of tax reduction. To analyze the effect of corporate tax reduction, we use Dynamic General Equilibrium (DGE) model and we use shooting algorithm to calculate the large corporate tax reduction (i.e. 5% or 20% corporate tax rate reduction). As a result, long-run effect of corporate tax reduction not only prompts to economic growth, but also increases total tax revenue, when financed by lump-sum transfer. Because current corporate tax rate is the right hand side of the Laffer curve. With respect to the magnitude of tax reduction, absolute impact of 20% reduction is much larger than that of 5%. But relative impact (i.e. multiplier effect of tax reduction) of 20% reduction is a little smaller than that of 5%. However, short-run effect is smaller than long-run one. In the short-run, since capital accumulation is insufficient, households decrease consumption and tax revenue.

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    File URL: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/pdf/dp/DP2011-021.pdf
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    Paper provided by Keio/Kyoto Joint Global COE Program in its series Keio/Kyoto Joint Global COE Discussion Paper Series with number 2011-021.

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    Length: 20 pages
    Date of creation: Nov 2011
    Date of revision:
    Handle: RePEc:kei:dpaper:2011-021
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    Web page: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/

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    1. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
    2. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    3. Ellen R. McGrattan, 1991. "The macroeconomic effects of distortionary taxation," Discussion Paper / Institute for Empirical Macroeconomics 37, Federal Reserve Bank of Minneapolis.
    4. Leeper, Eric M. & Yang, Shu-Chun Susan, 2008. "Dynamic scoring: Alternative financing schemes," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 159-182, February.
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    6. Gunji, Hiroshi & Miyazaki, Kenji, 2011. "Estimates of average marginal tax rates on factor incomes in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 25(2), pages 81-106, June.
    7. Anton Braun, R., 1994. "Tax disturbances and real economic activity in the postwar United States," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 441-462, June.
    8. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
    9. Paul M. Romer, 1987. "Crazy Explanations for the Productivity Slowdown," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 163-210 National Bureau of Economic Research, Inc.
    10. Ireland, Peter N., 1994. "Supply-side economics and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 559-571, June.
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