Domestic Tax Policy and the Foreign Sector: the Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium

49 Pages Posted: 12 Apr 2004 Last revised: 8 Jul 2010

See all articles by Lawrence H. Goulder

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

John B. Shoven

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

John Whalley

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for International Governance and Innovation (CIGI)

Date Written: June 1982

Abstract

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.

Suggested Citation

Goulder, Lawrence H. and Shoven, John B. and Whalley, John, Domestic Tax Policy and the Foreign Sector: the Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium (June 1982). NBER Working Paper No. w0919. Available at SSRN: https://ssrn.com/abstract=299795

Lawrence H. Goulder (Contact Author)

Stanford University - Department of Economics ( email )

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John B. Shoven

Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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John Whalley

University of Western Ontario - Department of Economics ( email )

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HOME PAGE: http://www.ssc.uwo.ca/economics/faculty/

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