How much can corporate tax reduction contribute to economic recovery, employment and feedback of tax revenue?

Kazuki Hiraga
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Kazuki Hiraga: Faculty of Economics, Keio University

No 2011-021, Keio/Kyoto Joint Global COE Discussion Paper Series from Keio/Kyoto Joint Global COE Program

Abstract: Recently, discussion of corporate tax reduction is hot political issue in Japan. Especially, some researchers and politicians insist on the reduction of corporate tax rate, following the fact of "Corporate tax paradox", which means that corporate tax revenue per Gross Domestic Product (GDP) has a negative correlation with effective corporate tax rate. However, quantitative effect of corporate tax reduction is unclear and the discussion of finance methods does not proceed. Therefore, we examine the quantitative effect of corporate tax reduction to employment, output and total tax revenue which is the cost of tax reduction. To analyze the effect of corporate tax reduction, we use Dynamic General Equilibrium (DGE) model and we use shooting algorithm to calculate the large corporate tax reduction (i.e. 5% or 20% corporate tax rate reduction). As a result, long-run effect of corporate tax reduction not only prompts to economic growth, but also increases total tax revenue, when financed by lump-sum transfer. Because current corporate tax rate is the right hand side of the Laffer curve. With respect to the magnitude of tax reduction, absolute impact of 20% reduction is much larger than that of 5%. But relative impact (i.e. multiplier effect of tax reduction) of 20% reduction is a little smaller than that of 5%. However, short-run effect is smaller than long-run one. In the short-run, since capital accumulation is insufficient, households decrease consumption and tax revenue.

Pages: 20 pages
Date: 2011-11
New Economics Papers: this item is included in nep-acc, nep-dge and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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