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Transition Strategies in Fundamental Tax Reform

Christian Keuschnigg and Mirela Keuschnigg ()

University of St. Gallen Department of Economics working paper series 2010 from Department of Economics, University of St. Gallen

Abstract: This paper discusses alternative transition strategies of moving towards an S-base cash-flow business tax. While the tax has attractive neutrality properties, moving from the current situation towards the new system often involves a stark trade-off between short-run losses and long-run gains. We evaluate several alternative transition strategies. The preferred strategy consists of instantaneous implementation, an 80% devaluation of historical tax depreciation claims, and transitory deficit financing for intertemporal tax smoothing. This policy prevents windfall gains or losses on old capital, avoids a negative impact on labor market performance and thereby prevents short-run income losses. Simulations with a calibrated model for Germany indicate that this transition policy induces strong investment driven growth and yields a 7% gain in GDP per capita and a reduction in the unemployment rate by 1.5 percentage points in the long-run.

Keywords: Cash-flow tax; investment; unemployment; transition policy (search for similar items in EconPapers)
JEL-codes: H21 H25 H32 J64 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2010-04
New Economics Papers: this item is included in nep-pub
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