TY - JOUR AU - Goulder,Lawrence H. AU - Shoven,John B. AU - Whalley,John TI - Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium JF - National Bureau of Economic Research Working Paper Series VL - No. 919 PY - 1982 Y2 - June 1982 UR - http://www.nber.org/papers/w0919 L1 - http://www.nber.org/papers/w0919.pdf N1 - Author contact info: Lawrence H. Goulder Department of Economics Landau Economics Building 328 Stanford University Stanford, CA 94305 Tel: 650/723-3706 Fax: 650/725-5702 E-Mail: goulder@stanford.edu John B. Shoven Department of Economics 579 Serra Mall at Galvez Street Stanford, CA 94305-6015 Tel: 650/723-3273 Fax: 650/723-8611 E-Mail: shoven@stanford.edu John Whalley Department of Economics Social Science Centre University of Western Ontario London, ON N6A 5C2 CANADA Tel: 519/661-3509 Fax: 519/661-3666 E-Mail: jwhalley@uwo.ca AB - 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. ER -