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Pathways to Fiscal Reform in the United States$
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John W. Diamond and George R. Zodrow

Print publication date: 2014

Print ISBN-13: 9780262028301

Published to MIT Press Scholarship Online: September 2015

DOI: 10.7551/mitpress/9780262028301.001.0001

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The Dynamic Economic Effects of a U.S. Corporate Income Tax Rate Reduction

The Dynamic Economic Effects of a U.S. Corporate Income Tax Rate Reduction

(p.343) 8 The Dynamic Economic Effects of a U.S. Corporate Income Tax Rate Reduction
Pathways to Fiscal Reform in the United States

John W. Diamond

George R. Zodrow

Thomas S. Neubig

Robert J. Carroll

The MIT Press

The U.S. statutory corporate income tax rate is now the highest in the world among industrialized countries, and has sparked many proposals for reform. In this chapter, John Diamond, George Zodrow, Thomas Neubig, and Robert Carroll use a dynamic, overlapping generations, computable general equilibrium model that includes an imperfectly competitive sector that earns above-normal returns, international capital flows, and income shifting to simulate the macroeconomic effects of various reforms of the corporate income tax. They consider base-broadening, rate-reducing reforms that are financed through (1) the elimination of a wide range of business tax expenditures, (2) a wage tax increase, and (3) a reduction in government spending. Their model simulation results suggest that reforms that finance rate reduction with the elimination of all business tax expenditures may reduce investment and GDP, while alternative reforms that retain many investment incentives or finance rate reduction with wage tax increases or cuts in government transfers are more likely to result in long run increases in investment and GDP.

Keywords:   corporate income tax reform, base-broadening rate-reducing reform, business tax expenditures, wage tax, reductions in government spending, computable general equilibrium modeling

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