Simulating U.S. Business Cash Flow Taxation

• Published in: Proceedings (Conference on Taxation) 2020-01, Vol.113, p.1-70
• Main Authors: Benzell, Seth G., Kotlikoff, Laurence J., Lagarda, Guillermo, Ye, Victor Yifan
• Format: Article
• Language: English
• Subjects: Reforming Tax Reform: Proposals for Future Tax Policy
• ISSN: 1549-7542; 2377-5661

Corporate taxation has come under increasing pressure around the world due to base erosion, profit shifting, and international tax competition, also known as the ”race to the bottom”. This paper uses the Global Gaidar Model, a 17-region, life-cycle simulation model, to study U.S. business cash flow taxation. We consider three policies. The first replaces all federal and state corporate taxation with a business cash flow tax. The second replaces just the federal corporate tax with a business cash flow tax. The third considers a proportionate response by eliminates all U.S. corporate taxation. The second is the adoption by the U.S. of a federal business cash flow tax. And the third is the second reform plus a matching, ”race to the bottom” corporate tax-rate cut by foreign regions. The GGM incorporates region-specific demographic change, region-specific productivity catch-up growth, and region-specific fiscal policy. Our calibration is based on 2014 data, when the U.S. had a relatively high marginal effective corporate tax rate (METR). We start at this date in part to understand how corporate tax reforms can differentially impact regions that have above-average corporate tax rates. All three reforms reduce the U.S. METR relative to that abroad. This leads to a major inflow of capital, a major rise in U.S. wages, and a commensurate decline in foreign capital and wages. The U.S. also benefits relative to other regions from earning a higher net return on its substantial net foreign asset position. Finally, lost or reduced corporate tax revenues are largely made up by increased consumption taxation. The associated redistribution away from older spenders to younger savers leads to more global saving and investment. Interestingly, overtime, as U.S. wage rise, Americans take more leisure. Hence, U.S. GDP, while temporarily higher due to each of the above three factors, ultimately falls as a share of world output. Yet, overall and through time, there are welfare gains for Americans. In contrast, the reforms tend to lower welfare abroad, particularly among early foreign generations who don’t benefit in the form of higher wages from the slow, but ultimately significant global capital-deepening.