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Transition Strategies in Fundamental Tax Reform

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  • Christian Keuschnigg

    ()

  • Mirela Keuschnigg

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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.

Suggested Citation

  • Christian Keuschnigg & Mirela Keuschnigg, 2010. "Transition Strategies in Fundamental Tax Reform," University of St. Gallen Department of Economics working paper series 2010 2010-10, Department of Economics, University of St. Gallen.
  • Handle: RePEc:usg:dp2010:2010-10
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/dp2010/DP-1010-Ke.pdf
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    References listed on IDEAS

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    Cited by:

    1. Keuschnigg, Christian & Keuschnigg, Mirela, 2012. "Transition Strategies in Enacting Fundamental Tax Reform," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(2), pages 357-385, June.
    2. 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.
    3. 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, September.

    More about this item

    Keywords

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

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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