Working Paper: NBER ID: w0919
Authors: Lawrence H. Goulder; John B. Shoven; John Whalley
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.
Keywords: Tax Policy; General Equilibrium; Foreign Trade; Capital Mobility
JEL Codes: H21; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital mobility (F20) | tax policy efficiency (H21) |
| foreign tax credit adjustments (F38) | efficiency advantage of transitioning from income tax to consumption tax (H21) |
| international capital flows (F32) | model's predictions (C52) |
| different external sector formulations (F29) | model's findings (C20) |