The Dynamic Economic Effects of a US Corporate Income Tax Rate Reduction

John Diamond, George Zodrow (zodrow@rice.edu), Thomas Neubig (tom.neubig@ey.com) and Robert Carroll (robert.j.carroll@ey.com)
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Thomas Neubig: Quantitative Economics and Statistics, Ernst & Young, LLP
Robert Carroll: Quantitative Economics and Statistics, Ernst & Young, LLP

No 1405, Working Papers from Oxford University Centre for Business Taxation

Abstract: This paper focuses on a reduction in the statutory corporate income tax rate. Of course, a reduction in the corporate tax rate would have to be financed by expansion of the corporate tax base, an increase in other taxes, a reduction in spending, and/or an increase in the deficit. The analysis considers three potential financing alternatives: elimination of a wide range of business tax expenditures, an increase in individual income taxes on labor income, and a decrease in government expenditures in the form of income transfers. Each package is designed to be revenue neutral in a dynamic sense, that is, taking into account the effects of the reform over time on saving, investment, labor supply, and other 3 macroeconomic variables. The dynamic analysis in the paper reflects simulations of the macroeconomic effects of reform using a modified version of a dynamic, overlapping generations, computable general equilibrium model developed by Diamond and Zodrow.

Date: 2014
New Economics Papers: this item is included in nep-mfd, nep-pbe and nep-pub
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