The Impact of Fundamental Tax Reform on the Allocation of Resources

Don Fullerton () and Yolanda K. Henderson

No 1904, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent proposals for fundamental tax reform differ in their relative emphasis on interasset, intersectoral, interindustry, and intertemporal distortions. The model in this paper addresses these multiple issues in the design of taxes on capital incomes. It is capable of measuring the net effects of changes in statutory rates, credits, depreciation allowances, and other features such as the indexation of interest and capital gains. It can compare costs of capital for individual assets, sectors, arid industries, and it weighs these together to evaluate the impact on total investment incentives. In a fully general equilibrium system, it can simulate alternative resource allocations and associated changes in welfare. For the overall evaluation of alternative tax reform proposals, the simultaneous consideration of these multiple effects is crucial. The model is used to compare current law, the Treasury tax reform plan of November 1984, and the Presidents proposal of May 1985. Under the "new view" that dividend taxes have a small effect on investment incentives, both reforms would reduce interasset distortions and the Presidents plan would reduce intersectoral distortions, but the Treasury plan would exacerbate intertemporal distortions. Still, for most parameters, both reforms generate net welfare gains even with slight declines in the capital stock. Under the "old view" that dividend taxes have a significant effect on investment incentives, both plans reduce corporate taxation through their partial deductions for dividends paid. They thus reduce intersectoral distortions as well as differences among assets. Under this view, the Treasury plan no longer increases intertemporal distortions. Even for the least favorable set of parameters in this case, these reforms raise both the capital stock and the real value of output above their baseline values. Finally, the paper shows alternative allocations of capital among assets, sectors, and industries.

Date: 1986-04
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as From The Effects of Taxation on Capital Accumulation, edited by Martin Feldstein, pp. 401-443. Chicago: The University of Chicago Press, 1987.
Published as The Impact of Fundamental Tax Reform on the Allocation of Resources , Don Fullerton, Yolanda Kodrzycki Henderson. in The Effects of Taxation on Capital Accumulation , Feldstein. 1987

Downloads: (external link)
http://www.nber.org/papers/w1904.pdf (application/pdf)

Related works:
Chapter: The Impact of Fundamental Tax Reform on the Allocation of Resources (1987)
Chapter: The Impact of Fundamental Tax Reform on the Allocation of Resources (1987)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:1904

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w1904

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().