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Simulating Business Cash Flow Taxation: An Illustration Based on the “Better Way” Corporate Tax Reform

Author

Listed:
  • Seth G. Benzell
  • Laurence J. Kotlikoff
  • Guillermo LaGarda

Abstract

The U.S., according to some measures, has one of the highest marginal effective corporate tax rates (METRs) of any developed country. Yet the tax collects less than 2 percent of GDP. This paper studies the impact of replacing the U.S. corporate tax with a Business Cash Flow Tax (BCFT). Our paper studies BCFT reform with reference to a particular, but reasonably generic, proposal, namely the House Republican “Better Way” tax plan. We use the Global Gaidar Model – a 17-region, global, overlapping-generations model, calibrated to U.N. demographic and IMF fiscal data – to simulate the dynamic, general equilibrium impact of this reform. In the short run, the U.S. capital stock, pre-tax wage rates, and GDP rise by roughly 25 percent, 8 percent, and 9 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. The tax reform produces enough additional revenues to permit a reduction in personal income tax rates while maintaining the economy's initial debt-to-GDP ratio. The beneficiaries of the House plan are today's and tomorrow's workers. We also simulate a matching METR cut by the rest of the world, which raises the world interest rate. The short-run increases in the capital stock, pre-tax wage rates, and GDP are smaller. However, along the transition path, all U.S. agents experience slightly higher welfare than under the House plan. This reflects the combination of a higher post-corporate tax world interest rate and Americans' disproportionately large holdings of global assets

Suggested Citation

  • Seth G. Benzell & Laurence J. Kotlikoff & Guillermo LaGarda, 2017. "Simulating Business Cash Flow Taxation: An Illustration Based on the “Better Way” Corporate Tax Reform," NBER Working Papers 23675, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23675 Note: CF EFG
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    References listed on IDEAS

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    1. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
    2. Kotlikoff, Laurence J. & Smetters, Kent & Walliser, Jan, 2007. "Mitigating America's demographic dilemma by pre-funding social security," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 247-266, March.
    3. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215-215.
    4. Eric Toder & Alan D. Viard, 2016. "Replacing Corporate Tax Revenues With a Mark-to-Market Tax on Shareholder Income," National Tax Journal, National Tax Association, vol. 69(3), pages 701-732, September.
    5. Seidman, Laurence S, 1984. "Conversion to a Consumption Tax: The Transition in a Life-Cycle Growth Model," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 247-267, April.
    6. Shoven, John B. & Whalley, John, 1972. "A general equilibrium calculation of the effects of differential taxation of income from capital in the U.S," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 281-321, November.
    7. Robert E. Hall & Alvin Rabushka, 1985. "The Route to a Progressive Flat Tax," Cato Journal, Cato Journal, Cato Institute, vol. 5(2), pages 465-480, Fall.
    8. Harry Grubert & Rosanne Altshuler, 2016. "Shifting the Burden of Taxation From the Corporate to the Personal Level and Getting the Corporate Tax Rate Down to 15 Percent," National Tax Journal, National Tax Association, vol. 69(3), pages 643-676, September.
    9. Fullerton, Don, et al, 1981. "Corporate Tax Integration in the United States: A General Equilibrium Approach," American Economic Review, American Economic Association, vol. 71(4), pages 677-691, September.
    10. Hans Fehr & Sabine Jokisch & Ashwin Kambhampati & Laurence J. Kotlikoff, 2013. "Simulating the Elimination of the U.S. Corporate Income Tax," NBER Working Papers 19757, National Bureau of Economic Research, Inc.
    11. repec:mes:challe:v:40:y:1997:i:6:p:63-84 is not listed on IDEAS
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    Cited by:

    1. Benjamin Carton & Emilio Fernández Corugedo & Benjamin L Hunt, 2017. "Identical Twins? Destination-Based Cash-Flow Taxes Versus Consumption Taxes with Payroll Subsidies," IMF Working Papers 17/276, International Monetary Fund.

    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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