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Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium

  • Lawrence H. Goulder
  • John B. Shoven
  • John Whalley

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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File URL: http://www.nber.org/papers/w0919.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0919.

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Date of creation: Jun 1982
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Publication status: published as Goulder, Lawrence H., John B. Shoven, and John Whalley. "Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations ..." Chapter 10 in Behavioral Simulation Methods in Tax Policy Analysis, ed. Martin Feldstein. Chicago:UCP, (1983).
Handle: RePEc:nbr:nberwo:0919
Note: PE
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  1. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  2. Vern Caddy, 1976. "Empirical Estimation of the Elasticity of Substitution : A Review," Centre of Policy Studies/IMPACT Centre Working Papers op-09, Victoria University, Centre of Policy Studies/IMPACT Centre.
  3. Whalley, John, 1980. "Discriminatory Features of Domestic Factor Tax Systems in a Goods Mobile-Factors Immobile Trade Model: An Empirical General Equilibrium Approach," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1177-1202, December.
  4. Fullerton, Don, 1983. "Transition Losses of Partially Mobile Industry-Specific Capital," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 107-25, February.
  5. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-37, May.
  6. Whalley, John & Yeung, Bernard, 1984. "External sector closing rules in applied general equilibrium models," Journal of International Economics, Elsevier, vol. 16(1-2), pages 123-138, February.
  7. 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.
  8. Robin W. Boadway & John M. Treddenick, 1978. "A General Equilibrium Computation of the Effects of the Canadian Tariff Structure," Canadian Journal of Economics, Canadian Economics Association, vol. 11(3), pages 424-46, August.
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