Working Paper: NBER ID: w23675
Authors: Seth G. Benzell; Laurence J. Kotlikoff; Guillermo Lagarda; Victor Yifan Ye
Abstract: This paper uses the Global Gaidar Model (GGM) to simulate replacing a territorial corporate income tax with a wealth tax imposed in the form of a destination-based Business Cash Flow Tax (BCFT). The specific BCFT reform considered is the “BetterWay” Tax, a proposed but never enacted corporate-income tax reform. The GGM model is a 90-period OLG model, featuring 17 regions that collectively encompass the global economy. It is carefully calibrated to IMF fiscal data and the UN's region-specific fertility and mortality estimates and projections. According to the model, the BW plan produces, over a decade, increases in the capital stock, GDP, and pre-tax wages for high- and low- skilled workers of 20.5 percent, 6.8 percent, 6.3 and 7.5 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. Despite this, the initially revenue neutral tax reform raises enough additional revenue over time to permit a reduction in personal income tax rates. This result is not predicated on unrealistic labor supply behavior. Rather it is caused by the reform's significant decrease in the marginal effective tax on U.S. investment, which induces a large influx of capital to the U.S. The main beneficiaries of the reform are today's and tomorrow's workers. We also simulate retaliatory cuts in foreign effective marginal corporate tax rates. This changes our results, but not by much. The reasons are two. First, the relative incentive to invest in the U.S. still rises dramatically. Second, Americans, who own a disproportionate amount of oversees assets, benefit disproportionately from the reduced global taxation of asset income.
Keywords: Business Cash Flow Tax; Corporate Income Tax; Tax Reform; Global Economy
JEL Codes: E02; F43; H2; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| BCFT reform (F38) | decrease in marginal effective tax on US investment (F20) |
| decrease in marginal effective tax on US investment (F20) | influx of capital into US economy (F21) |
| influx of capital into US economy (F21) | increase in capital stock (E22) |
| influx of capital into US economy (F21) | increase in GDP (E20) |
| influx of capital into US economy (F21) | increase in pretax wages for high-skilled workers (J39) |
| influx of capital into US economy (F21) | increase in pretax wages for low-skilled workers (J31) |
| BCFT reform (F38) | increase in capital stock (E22) |
| BCFT reform (F38) | increase in GDP (E20) |
| BCFT reform (F38) | increase in pretax wages for high-skilled workers (J39) |
| BCFT reform (F38) | increase in pretax wages for low-skilled workers (J31) |