Simulating Business Cash Flow Taxation: An Illustration Based on the “Better Way” Corporate Tax Reform

61 Pages Posted: 17 Aug 2017 Last revised: 5 Sep 2017

See all articles by Seth Benzell

Seth Benzell

Boston University - Department of Economics

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Guillermo LaGarda

Boston University - Department of Economics; Inter-American Development Bank (IDB)

Date Written: August 2017

Abstract

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

Suggested Citation

Benzell, Seth and Kotlikoff, Laurence J. and LaGarda, Guillermo, Simulating Business Cash Flow Taxation: An Illustration Based on the “Better Way” Corporate Tax Reform (August 2017). NBER Working Paper No. w23675. Available at SSRN: https://ssrn.com/abstract=3018334

Seth Benzell (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

Laurence J. Kotlikoff

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-4002 (Phone)
617-353-4449 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gaidar Institute for Economic Policy

Gazetny per. 5-3
Moscow, 125993
Russia

Guillermo LaGarda

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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