Simulating Corporate Income Tax Reform Proposals with a Dynamic CGE Model

Abstract

Opinion leaders and policy makers in the United States have turned their focus to the corporate income tax, which now has the highest statutory rate in the developed world. Using a dynamic computable general equilibrium model (the "NCPA-DCGE Model"), we simulate alternative policies for reducing the U.S. corporate income tax. We find that reductions in the corporate income tax rate result in significant positive impacts on output, investment, capital formation, employment, and household well-being (for almost all deciles). All of the hypothesized reforms also result in a more-streamlined public sector. These results are plausible insofar as the DCGE model from which they are obtained is parameterized by plausible elasticity assumptions, and incorporates the adjustments in prices, output, employment and investment that result from changes in tax policy.

Corporate taxes and high-quality entrepreneurship

“…Taxes also influence the type of entrepreneurial activity. Entrepreneurs' strategic decisions are tax-sensitive, examples being their willingness: to introduce new products and services (Darnihamedani et al 2018), to invest in corporate investments and capital formation (Djankov et al 2010;Bhattarai et al 2017), and to hire new employees (Carroll et al 2000).…”

Taxes, start-up costs, and innovative entrepreneurship

“…This result of our study is in line with two recent papers calculating the impacts of the proposed tax reform of the US government. Bhattarai et al (2017) and Haughton et al (2017) simulate the impacts of the proposed cut in the corporate income tax rate and find that corporate investments and capital formation will increase. In particular, innovative industries such as machinery and instruments as well as the computer sector will benefit.…”

Economic Instrument in Environmental Management: A Case Study of Environmental Protection Tax in Vietnam

“…It is not easy to find robust data on the impacts of environmental taxes. Extrapolating which changes are due to an environmental tax's direct and indirect effects on behavior and macro-economy is not simple [10,12].…”