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Transition Strategies in Fundamental Tax Reform

Listed author(s):
  • Christian Keuschnigg

    ()

  • Mirela Keuschnigg

    ()

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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File URL: http://ux-tauri.unisg.ch/RePEc/usg/dp2010/DP-1010-Ke.pdf
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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
Handle: RePEc:usg:dp2010:2010-10
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