Simulating Business Cash Flow Taxation: An Illustration Based on the “Better Way” Corporate Tax Reform
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
We thank the Gaidar Institute, Boston University, and The Fiscal Analysis Center for research support. The Global Gaidar Model used in this study was co-developed by the authors together with Maria Kazakova, Kristina Nesterova, and Andrey Zubarev of the Gaidar Institute, Victor Ye of Boston University and Marco Solera of the Inter-American Development Bank. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research or the Inter-American Development Bank.
Laurence J. Kotlikoff
The terms under which Economic Security Planning, Inc. have provided its core software for use in this study, namely on a zero-cost basis, have been reviewed and approved by Boston University in accordance with its conflict of interest policy. Laurence Kotlikoff is the principal shareholder of Economic Security Planning, Inc. His son and sister work for the company and are also shareholders. Economic Security Planning, Inc. could potentially benefit were individuals or organizations to read this study and pay the company to do related research on, for example, their favored tax reforms.Guillermo LaGarda
The views expressed herein are those of the authors and do not necessarily reflect the views of the Interamerican Development Bank.