## 1. Statutory Central Government Corporate Tax Rates

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### Introduction and context
- In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), a comprehensive overhaul of the U.S. personal and business income tax system.
- Stated objectives of the TCJA include: simplifying the system; making the U.S. business tax competitive in an international context; providing tax relief to lower- and middle-income Americans; not providing income tax cuts to the wealthy; lowering statutory rates and broadening tax bases; creating a more equitable system; achieving these objectives without adding to the fiscal deficit.
- Independent fiscal cost estimates cited:
  - Congressional Budget Office (CBO, 2018) static cost: around US$2.3 trillion added to the budget deficit over the next ten years.
  - CBO with macroeconomic feedbacks: US$1.9 trillion added to the deficit over the next ten years.

### A lower statutory corporate income tax rate
- Key changes:
  - Federal statutory corporate tax rate: 35 percent → 21 percent.
  - Subnational corporate taxes:
    - state level: 0 to 10 percent;
    - local level: 0 to 6.4 percent.
  - Elimination of deduction for income from qualified production activities; general taxation of most C-Corporation income at a common 21 percent federal statutory rate (subject to FDII deduction effects).
- Findings and profit-shifting estimates (using Beer, de Mooij and Li (2018) semi-elasticity = 1.5):
  - 14-point statutory rate cut implies a 21 percent increase in the reported CIT base in the U.S.
  - Reported CIT base (Table 6): US$907 (billion).
  - Implied increase in the base: US$190 (billion).
  - Estimated pre-reform profit shifting: US$198 billion.
  - Revenue loss from the reduced rate, at the pre-reform level of the base: about US$120 billion.
  - Additional revenue (at the new low rate) from reduced profit shifting: about US$40 billion (noting this is much more than offset by the revenue loss from the rate cut itself).
  - Joint Committee on Taxation estimate of revenue cost cited: US$1.4 billion over the next 10 years.
- Appraisal:
  - Cut reduces distortions incentivizing profit shifting, inversions, and artificially high leverage.
  - Restores U.S. central government statutory rate to a position similar to early 1990s and close to OECD norms (central government rates only).
  - Could remove an anchor supporting CIT rates elsewhere and aggravate international tax competition.

### Investment and finance: expensing, depreciation, and interest deductibility
- Expensing and depreciation (pre- and post-TCJA):
  - Pre-TCJA bonus depreciation: 50 percent write-off in first year for property with recovery period ≤ 20 years (remaining 50 percent on standard schedules); applied only to original first use assets.
  - TCJA change: 100 percent immediate expensing for various new and used tangible property with recovery period under 20 years.
    - 100 percent write-off applies until end-2022;
    - from 2023–27 there will be a gradual reduction in the share of investment that can be immediately expensed.
  - From 2022, R&D expensing replaced by depreciation (significant reduction in generosity for R&D).
- Interest deductibility limits:
  - Prior rule: interest deductions to related parties limited in thin capitalization cases (debt-to-equity > 1.5) to 50 percent of adjusted taxable income; disallowed interest could be carried forward indefinitely.
  - TCJA limits:
    - 2018–21: interest deductions capped at 30 percent of earnings before net interest expenses, tax, depreciation, amortization, depletion and net operating loss.
    - From 2022: 30 percent cap applies to a more binding definition of earnings before interest, tax and net operating loss.
    - Disallowed interest deductions can be carried forward.
    - Exemptions: a range of real estate businesses, farms, and regulated utilities; no specific provisions noted for financial services companies.
    - Subpart F treatment of interest unchanged.
- Appraisal and METR evidence:
  - Full expensing reduces the marginal effective tax rate (METR) on new equity-financed capital projects; under full expensing (presuming full loss offset), METR on equity-financed investment would be zero.
  - Gravelle and Marples (2018):
    - average METR for equity-financed investment reduced from around 16 percent to 3 percent;
    - average METR for debt-financed investments increased from -64 to -48 percent across all assets;
    - averaging over all assets and finance types, average METR moves from 1.7 percent to -3.6.
  - Beer, Klemm and Matheson (2018):
    - debt-financed METR reduced from -174 to -57 percent (different methodology).
  - Net effects:
    - METRs fall for equity-financed investment and increase for debt-financed investment;
    - dispersion of METRs converges toward zero, implying efficiency gains from reduced tax-induced misallocation.
  - Concerns:
    - Interest caps reduce debt bias and debt shifting but introduce procyclical distortions (caps bind when earnings weaken), potentially exacerbating bankruptcy pressures.
    - Thin capitalization rules imperfect; do not adequately address financial institutions.
    - Phaseout of full expensing beginning 2023 creates timing distortions and front-loading incentives.
- Policy alternatives discussed:
  - Move toward an Allowance for Corporate Equity (ACE) to remove debt bias by providing a notional deduction for equity finance while maintaining interest deductions.
  - Alternatively, maintain cash-flow treatment of investment while eliminating deduction for interest on newly-contracted debt, with appropriate transition rules.

### Repeal of the Corporate Alternative Minimum Tax (AMT)
- Background and mechanism:
  - AMT in current form adopted in 1986 (minimum tax since 1969).
  - Calculated hypothetical tax at 20 percent on a broader base limiting certain deductions; corporations paid larger of AMT or regular liability.
  - Small businesses exempted from AMT in 1997.
- Effects and appraisal:
  - AMT mainly affected a small subset of industries (notably finance, insurance, and mining and manufacturing) and generated a relatively small share of business tax revenues.
  - Created compliance costs due to parallel calculations and tracking credits, basis, carryovers.
  - Appraisal conclusion: Eliminating the corporate AMT is positive—moderate revenue cost and lessens compliance and complexity.

### Pass-through deduction: structure, scope, and appraisal
- Structure:
  - TCJA introduces a 20 percent deduction for qualified pass-through income, effectively reducing maximum effective rate on qualifying pass-throughs from 39.6 percent to 29.6 percent.
  - Deduction available to all with incomes under thresholds (for joint-filers earning under US$315,000 of taxable income), regardless of business.
  - For “specified services businesses” the 20 percent deduction phases out for joint-filers earning from US$315,000 to US$415,000.
  - Specified services businesses include law, medical, accounting, consulting, brokerage, professional athletes, and trades where principal asset is reputation or skill; engineering and architectural services are explicitly excluded.
- Caps for non-specified-service businesses:
  - 20 percent deduction capped at the lower of 50 percent of W-2 wages of the firm or 25 percent of W-2 wages plus 2.5 percent of the value of undepreciated tangible assets.
  - Limits do not apply to real estate investment trusts.
  - Ambiguity on aggregation across multiple pass-through entities.
- Appraisal:
  - Comparative effective rates:
    - qualifying pass-throughs: 29.6 percent;
    - distributed corporate profits: 32.85 percent;
    - top marginal PIT rate: 37 percent.
  - Incentives to recharacterize income and shift organizational form to exploit lower rates; potential erosion of PIT and C-corporation bases.
  - Guardrails increase complexity and may be ineffective in preventing base erosion.
- Policy recommendation:
  - Preferable not to have the 20 percent deduction for certain pass-through income to maintain neutrality and simplicity.
  - Alternative: limit deduction to pass-through income below a threshold to benefit small businesses and entrepreneurs.

### International provisions: territoriality, transition tax, GILTI, FDII, and BEAT
- Territoriality and transition tax:
  - System moves toward territoriality (subject to caveats), excluding active foreign business income from U.S. taxation.
  - Deemed repatriation on accumulated offshore earnings (~US$2.6 trillion stock):
    - 15.5 percent for funds held in cash or cash-equivalent assets for corporate owners;
    - 8 percent for the remainder;
    - payable over the next 8 years.
  - Deemed repatriation is the substantive revenue-raising element highlighted.
- GILTI (Global Intangible Low Taxed Income):
  - Imposes minimum tax on overseas income in excess of 10 percent of return on tangible assets abroad.
  - Key parameters:
    - Taxes at 21 percent the aggregate of CFCs’ income in excess of 10 percent of qualified business asset investment, with a deduction for corporate recipients of 50 percent of that income.
    - Credit for 80 percent of foreign tax paid on such income.
    - No deferral and no link to repatriation.
    - Effective minimum rate on GILTI income of 10.5 percent when no tax is paid abroad.
    - U.S. liability eliminated if foreign tax on that income is ≥ 13.125 percent (10.5 percent ÷ 80 percent).
  - Future parameter change:
    - From taxable years starting in 2026, deductible portion falls to 37.5 percent and minimum rate increases to 13.125 percent (foreign rate to extinguish U.S. liability rises to 16.406 percent).
  - Practical calculations cited:
    - Average effective GILTI rate relative to foreign pre-tax income ≈ 2.9 percent and average foreign tax rate ≈ 7.9 percent (one analysis suggests GILTI may bite for most U.S. multinationals).
- FDII (Foreign Derived Intangible Income):
  - Domestic corporations receive a 37.5 percent deduction from the corporate tax base for FDII (income in excess of 10 percent of qualified business asset investment multiplied by share of foreign-derived income).
  - Effectively reduces corporate tax rate from 21 to 13.125 percent for qualifying income arising from U.S.-produced goods/services sold to non-U.S. parties (to the extent income exceeds 10 percent of tangible assets).
  - Future parameter change:
    - From 2026, deductible portion falls to 21.875 percent (implying effective rate of 16.406 percent).
  - One estimate: had FDII been in effect in 2014, ≈ 9 percent of all U.S. companies and 13 percent of multinationals would have been eligible, concentrated in manufacturing.
- BEAT (Base Erosion and Anti‑Abuse Tax):
  - Applies to multinationals with annual gross receipts > US$500 million (preceding 3 years) and cross-border payments to affiliates exceeding 3 percent of total deductible expenses.
  - Targets interest, royalties, management fees (excluded: cost of goods sold).
  - Liability equals the larger of:
    - (i) a tax at 5 percent (rising over time) on “modified” taxable income (adding back deductible cross-border payments not part of COGS); or
    - (ii) regular tax liability (net of tax credits) under normal CIT base (with some exceptions until 2025).
  - BEAT rates: 5 percent initially; rises to 10 percent for 2019–25; 12.5 percent thereafter.
  - Applies to U.S. and foreign companies with income effectively connected with a U.S. trade or business; excludes individuals, S-corporations, regulated investment companies, REITs.
  - BEAT contains no test that recipient payments are lightly taxed.
- Appraisal of interaction and incentives:
  - Territoriality can restore capital import and ownership neutrality but fails capital export neutrality (CEN), creating distortions based on third-country tax rates.
  - GILTI incentivizes a low ratio of income to tangible assets (numerator/denominator effects); can push income recognition to the U.S. and tangible assets abroad.
  - FDII provides a “carrot” (preferential rate) complementing GILTI’s “stick”; creates distortion favoring exports and may face WTO and G20‑OECD BEPS scrutiny.
  - BEAT may be punitive for legitimate cross-border commercial activity; could incentivize recharacterization of payments or restructuring.
  - Combined effects create complexity and uncertainty; many detailed rules remain to be defined.

### Tax‑efficient location decision (tangibles serving foreign markets) and METR implications
- Boundary condition for r > 0.1 (from Figure 5):
  - r TF + max{(r − 0.1), 0} = (0.21)[r − 0.375(r − 0.1)]
  - Left term: tax payable under GILTI; right term: tax payable under FDII.
- Implication: U.S. preferred for locating investment (taxed under FDII at 13.125 percent) unless foreign tax rate is only slightly above that level.
- METR implications:
  - FDII often creates a disincentive to create tangible assets in the U.S. because adding tangible capital increases benchmark base (10 percent return) and reduces income eligible for FDII preferential rate, increasing tax liability (i.e., METR positive in many cases).
  - GILTI (in absence of foreign taxes) tends to create incentives to locate tangible assets abroad; METR on investing abroad can be negative.
  - METR sign depends on regime when investing (Period 1) and when income is received (Period 2); Appendix I shows:
    - Period 1 = FDII, Period 2 = FDII: METR positive (+ +)
    - Period 1 = Standard, Period 2 = FDII: METR positive (+ +)
    - Period 1 = FDII, Period 2 = Standard: METR negative (−̶)
    - Period 1 = Standard, Period 2 = Standard: METR = 0
  - Under GILTI, the sign pattern is the precise opposite of FDII (assuming no foreign taxes and τ = 0).

### Macroeconomic effects (model simulations) and fiscal multipliers
- Simulation approach: DSGE models calibrated using JCT (2017) static costing as net impulse and implied effective tax rate changes.
- Near-term GDP level impact:
  - Collective impact estimated to increase GDP level over near-term by 1.2 percent (by 2020); much is cyclical demand stimulus; modest potential growth gains via investment.
- Fiscal impact and GDP level impact (2018–2020) — percent of GDP deviations from pre-tax baseline and average multiplier (GDP level impact / structural deficit impact):
  - Total: Fiscal = −1.2, GDP = 1.2, Multiplier = 1.0
  - Corporate and pass-through: Fiscal = −0.5, GDP = 0.9, Multiplier = 1.8
  - Personal: Fiscal = −0.6, GDP = 0.3, Multiplier = 0.4
  - Tax on unrepatriated profits: Fiscal = 0.1, GDP = 0.0, Multiplier = 0.0
  - Tax on foreign profits (territorial): Fiscal = −0.1, GDP = 0.0, Multiplier = 0.0
- Inflation, unemployment, and monetary policy:
  - GDP above potential → unemployment likely to fall further below full employment; more than a decade to reconverge to natural rate.
  - Upward inflation pressures imply Federal Reserve would raise policy rates faster to achieve 2 percent PCE inflation and full employment.

### Fiscal outlook, debt implications, and distributional considerations
- Reduction in tax revenues and looser fiscal policy raise primary deficit-GDP and put federal debt-GDP on a steeper upward path.
- Differences with CBO projections: CBO finds larger and more lasting effect on potential output but smaller cyclical component; CBO projects less reversal of revenue effect within 10-year horizon.
- Distributional points related to PIT and business incidence:
  - Around 95 percent of U.S. businesses are pass-throughs.
  - In 2013, 51 percent of business income earned by pass-throughs; > two-thirds of that income accrued to top 1 percent.
  - Incidence on labor is debated; some European estimates put corporate tax incidence on labor at ≈ 30 percent.
  - U.S. is not a small economy; extensive nonresident ownership suggests benefits from lower business taxes may accrue to non-residents.
  - If reform moves system closer to a rent tax, burden on labor would be alleviated; the extent to which business tax changes benefit workers remains an open question.

### International spillovers, revenue, and strategic responses
- Macroeconomic spillovers:
  - U.S. demand stimulus → faster U.S. monetary normalization, rise in US dollar and interest rates.
  - Net effect: higher import growth, U.S. current account deficit to around 3½ percent of GDP by 2019–20, upward pressure on dollar, worsening international investment position.
  - Largest external effects in Canada and Mexico; global imbalances expected to rise.
  - Faster Fed tightening could create volatility, tighter global financial conditions, and adverse effects for USD borrowers and emerging markets.
- Tax-related spillovers and multinational investment effects (Beer, Klemm and Matheson (2018)):
  - Median reduction in multinational investment: between 1.1 and 2.7 percent of their capital stock (assuming no change in tax rates outside U.S.).
  - Reduction of 5 to 20 percent in most affected percentile.
  - Median tax revenue from multinationals estimated to fall by 0.6 to 1.3 percent (and 3 to 21 percent in top percentile).
  - Median revenue loss outside U.S. from profit shifting estimated at 1.3 to 2.8 percent of revenue from multinationals (assuming unchanged tax rates outside U.S.).
- Strategic international responses:
  - U.S. as Stackelberg leader or Nash play yields different global rate responses (example: Nash scenario in Beer, Klemm and Matheson (2018) — rates abroad fall by 4.6 points while U.S. rate falls by 16.8 points instead of 14 points).
  - Uncertainty in strategic interactions is a major source of assessment uncertainty.

### Concluding policy implications and unresolved issues
- Structural reforms have profound international tax regime implications; do not reduce to simple rate competition.
- Potential responses by other countries include adopting analogous GILTI, modified BEAT-like measures, varying tax rates with returns on tangible investment, and other instruments beyond statutory rates.
- TCJA addresses some distortions but leaves unresolved problems: debt bias, profit shifting, arms-length pricing, and digitalization-driven tax challenges.
- Large fiscal cost implies potential need for additional tax or spending measures to restore fiscal position, possibly reintroducing measures not in TCJA (examples mentioned: federal VAT, carbon taxation, increase in gasoline tax).

### Appendix I — Selected METR analytical findings (FDII and GILTI)
- Setup highlights:
  - Equity-financed tangible investment I at time 0, immediately expensed, sells remaining (1−δ)I at time 1.
  - μt = 1 if firm faces reduced FDII rate τF, and 0 if it faces standard rate τ; τt* = μt τF + (1−μt) τ.
  - Additional tax paid in period 0: −τ0* I.
  - Additional tax in period 1: τ1*[F(I)+(1−δ)I] + μ1(τ−τF)(0.1)(K+I).
  - After-tax profit Π(I) = −(1−τ0*)I + 1/(1+r){(1−τ1*)[F(I)−(1−δ)I] − μ1(τ−τF)(0.1)I}; r>0 required return on equity.
  - Wedge Θ ≡ F′ − r − δ = (τ1* − τ0*)(1 + r) + μ1(0.1)(τ − τF) / (1 − τ1*).
- Four cases and Θ signs:
  - Case 1 (FDII both periods: μ0=μ1=1; τ0*=τ1*=τF):
    - Θ = (τ − τF)(0.1) / (1 − τF) > 0.
  - Case 2 (FDII period 0, standard period 1: μ0=1, μ1=0; τ0*=τF, τ1*=τ):
    - Θ = (τ − τF)(1 + r) / (1 − τ) > 0.
  - Case 3 (Standard both periods: μ0=μ1=0; τ0*=τ1*=τ):
    - Θ = 0.
  - Case 4 (Standard period 0, FDII period 1: μ0=0, μ1=1; τ0*=τ, τ1*=τF):
    - Θ = −(τ − τF)(r + 0.9) / (1 − τF) < 0.
- METR for GILTI:
  - Assuming no foreign taxes and setting τ = 0, the sign pattern for GILTI is the precise opposite of that for FDII.

*Source: IMF Working Paper — section "1. Statutory Central Government Corporate Tax Rates" (wp18185).*

### 1. Statutory Central Government Corporate Tax Rates  ______________________________5

### 1. Statutory Central Government Corporate Tax Rates

### Introduction and context
- In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), a comprehensive overhaul of the U.S. personal and business income tax system.
- Stated objectives of the TCJA include:
  - simplifying the system;
  - making the U.S. business tax competitive in an international context;
  - providing tax relief to lower- and middle-income Americans;
  - not providing income tax cuts to the wealthy;
  - lowering statutory rates and broadening tax bases;
  - creating a more equitable system (including by taxing households at similar levels of income in a uniform way, independent of their type of business or source of income);
  - achieving these objectives without adding to the fiscal deficit.
- Independent estimates indicate substantial fiscal costs:
  - Congressional Budget Office (CBO, 2018) static cost: around US$2.3 trillion added to the budget deficit over the next ten years.
  - CBO with macroeconomic feedbacks: policy changes add US$1.9 trillion to the deficit over the next ten years.
- This section reviews central features of the reform related to corporate taxation, and evaluates implications for investment, finance, profit shifting, and international spillovers.

### A lower statutory corporate income tax rate
- The TCJA lowers the federal statutory rate on incorporated businesses from 35 to 21 percent.
- Subnational corporate taxes range:
  - state level: 0 to 10 percent;
  - local level: 0 to 6.4 percent.
- The change eliminates the deduction for income from qualified production activities and generally ensures that most C-Corporation income is taxed at a common 21 percent federal statutory rate (noting a new FDII deduction that can affect rates on corporate income arising from foreign sales).

Findings and estimates:
- Applying the semi-elasticity estimate from Beer, de Mooij and Li (2018) (1.5 semi-elasticity of reported profits with respect to the tax differential), the 14-point cut in the statutory rate implies:
  - a 21 percent increase in the reported CIT base in the U.S.;
  - additional revenue (at the new low rate) of about US$40 billion from reduced profit shifting (noting that this is much more than offset by the revenue loss from the rate cut itself).
- Specific figures referenced using Beer, de Mooij and Li (2018) Table 6:
  - reported CIT base: US$907 (billion);
  - implied increase in the base: US$190 (billion);
  - estimated pre-reform profit shifting: US$198 billion;
  - revenue loss from the reduced rate, at the pre-reform level of the base: about US$120 billion.
- Joint Committee on Taxation estimate of revenue cost: US$1.4 billion over the next 10 years (as stated in the source).

Appraisal (statutory rate change):
- The cut reduces distortions that incentivize profit shifting, inversions, and artificially high leverage.
- Restores the U.S. to a relative position similar to the early 1990s and close to OECD norms on central government statutory rates (central government rates only).
- From other countries’ perspective, the reduction may remove an anchor supporting CIT rates elsewhere and could aggravate international tax competition; international implications are explored in Section V of the source.

### Investment and finance: expensing, depreciation, and interest deductibility

Expensing and depreciation under TCJA:
- Pre-TCJA bonus depreciation: 50 percent write-off in first year for property with recovery period of 20 years or less (with the remaining 50 percent on standard schedules); applied only to original first use assets.
- TCJA change: firms can fully expense (100 percent immediate deduction) various forms of both new and used tangible property with a recovery period under 20 years.
  - 100 percent write-off applies until end-2022;
  - from 2023–27 there will be a gradual reduction in the share of investment that can be immediately expensed.
- From 2022, R&D expensing replaced by depreciation (a significant reduction in generosity for R&D).

Treatment of interest expenditure under TCJA:
- Previously, interest deductions to related parties (where corresponding interest income was not taxed in the U.S.) were limited to 50 percent of a firm's adjusted taxable income in certain thin capitalization cases (debt-to-equity ratio > 1.5 and some interest not subject to U.S. tax); disallowed interest could be carried forward indefinitely.
- TCJA introduces broader limits on interest deductibility:
  - From 2018–21, interest deductions capped at 30 percent of earnings before net interest expenses, tax, depreciation, amortization, depletion and net operating loss.
  - From 2022 onwards, the 30 percent cap applies to a more binding definition of earnings before interest, tax and net operating loss.
  - Disallowed interest deductions can be carried forward.
  - No relief for firms with debt-equity ratio under 1.5 or for interest payments later subject to U.S. income tax.
  - New limits exclude specific sectors: a range of real estate businesses, farms, and regulated utilities are exempt; financial services companies have no specific provisions noted.
- Subpart F treatment of interest was not changed by the TCJA.

Appraisal (expensing and interest rules):
- Full expensing reduces the marginal effective tax rate (METR) on new equity-financed capital projects; moves U.S. corporate tax closer to a cash-flow tax form for qualifying investments.
- Under full expensing (presuming full loss offset), METR on equity-financed investment would be zero.
- Gravelle and Marples (2018) estimate:
  - average METR for equity-financed investment reduced from around 16 percent to 3 percent due to the TCJA.
  - average METR for debt-financed investments increased from -64 to -48 percent across all assets (Table 2 cited).
  - averaging over all assets and finance types, Gravelle and Marples find a modest change in average METR from 1.7 percent to -3.6 (allowing for some non-deductibility of interest).
- Beer, Klemm and Matheson (2018) estimate a reduction in METR for debt-financed investment from -174 to -57 percent (Table 2 cited, different methodology).
- Net effects:
  - METRs fall for equity-financed investment and increase for debt-financed investment;
  - dispersion of METRs converges toward zero, implying efficiency gains from reduced tax-induced misallocation of capital.
- The restriction on interest deductibility reduces debt bias and debt shifting, a positive step for financial stability, but:
  - thin capitalization rules are imperfect and do not adequately address financial institutions;
  - interest caps introduce procyclical distortions—caps become more binding when earnings weaken, potentially exacerbating bankruptcy pressures;
  - TCJA’s restrictions on loss offset amplify this procyclicality.
- Full expensing is scheduled to phase out beginning 2023, creating timing distortions and incentives to front-load investment.
- Policy alternatives suggested in the source (analysis, not prescriptive text to be treated as invented):
  - Move toward an Allowance for Corporate Equity (ACE) to remove debt bias by providing a notional deduction for equity finance while maintaining interest deductions.
  - Alternatively, maintain cash-flow treatment of investment while eliminating deduction for interest on newly-contracted debt, with appropriate transition rules.

### Key statistics and exact figures preserved from the source
- Federal statutory corporate tax rate pre-TCJA: 35 percent.
- Federal statutory corporate tax rate post-TCJA: 21 percent.
- Subnational corporate tax ranges:
  - state level: 0 to 10 percent;
  - local level: 0 to 6.4 percent.
- CBO fiscal cost estimates:
  - static: around US$2.3 trillion over the next ten years;
  - with macro feedbacks: US$1.9 trillion over the next ten years.
- Beer, de Mooij and Li (2018) parameters and figures:
  - semi-elasticity used: 1.5;
  - implied 21 percent increase in reported CIT base from a 14-point rate cut;
  - reported CIT base (Table 6): US$907;
  - implied increase in base: US$190;
  - estimated pre-reform profit shifting: US$198 billion;
  - revenue loss from rate reduction at pre-reform base: about US$120 billion.
- Additional revenue from reduced profit shifting at new rate: about US$40 billion (noting offset by rate cut revenue loss).
- Joint Committee on Taxation estimated revenue cost cited: US$1.4 billion over the next 10 years (as stated in the source).
- Expensing timeline: 100 percent write-off applies until end-2022; gradual reduction from 2023–27.
- Interest deduction caps:
  - 2018–21: capped at 30 percent of earnings before net interest expenses, tax, depreciation, amortization, depletion and net operating loss;
  - from 2022: 30 percent cap applies to a more binding definition of earnings before interest, tax and net operating loss.
- METR estimates:
  - Gravelle and Marples (2018): equity-financed METR reduced from around 16 percent to 3 percent; debt-financed average METR increased from -64 to -48 percent; overall average METR moved from 1.7 percent to -3.6.
  - Beer, Klemm and Matheson (2018): debt-financed METR reduced from -174 to -57 percent (different methodology).

*Source: IMF Working Paper — section "1. Statutory Central Government Corporate Tax Rates" (excerpted).*

### introduction of temporary expensing for a subset of investments. More challenging,

### wp18185 - introduction of temporary expensing for a subset of investments. More challenging,

### Repeal of the Corporate Alternative Minimum Tax (AMT)
- Background and mechanism:
  - The AMT in its current form was adopted in 1986 (minimum tax in place since 1969).
  - Required corporations to calculate a hypothetical tax liability at a 20 percent rate on a broader base that limited certain deductions (e.g. depreciation, foreign tax credits, net operating losses, certain intangible costs) and added back certain nontaxed income (e.g. tax-exempt interest).
  - Corporations paid the larger of the calculated AMT or the liability under the business income tax system.
  - Small businesses were exempted from the AMT in 1997.
- Effects and appraisal:
  - The AMT mainly affected a small subset of industries (notably finance, insurance, and mining and manufacturing) and generated a relatively small share of business tax revenues.
  - The AMT created compliance costs because companies must calculate tax liability under both systems and keep track of credits, basis of depreciable property, carryovers, credits and operating losses.
  - Appraisal conclusion: Eliminating the corporate AMT is a positive step — the revenue cost is moderate and it will lessen compliance and complexity costs associated with parallel tax calculations.

### Changes to the Personal Income Tax (PIT) — Tax Rates
- Key features:
  - Under the TCJA, marginal rates under the PIT have been reduced for married couples earning above US$19,050 (US$9,525 for individuals).
  - The changes to the rate structure expire after 2025 and the system will revert to the pre-TCJA brackets.
  - Tax brackets will be indexed to chained CPI (versus CPI previously), which the JCT estimates recovers around US$133bn in revenues over the next decade.
- Tax rate schedule for Married Filing Jointly (as presented):
  - Pre-TCJA:
    - < 19,050: 10%
    - 19,050-77,400: 15%
    - 77,400-156,150: 25%
    - 156,150-237,950: 28%
    - 237,950-424,950: 33%
    - 424,950-480,050: 35%
    - > 480,050: 39.6%
  - TCJA:
    - < 19,050: 10%
    - 19,050-77,400: 12%
    - 77,400-165,000: 22%
    - 165,000-315,000: 24%
    - 315,000-400,000: 32%
    - 400,000-600,000: 35%
    - > 600,000: 37%

### Deductions and Exemptions
- Major changes:
  - The standard deduction increased from US$13,000 to US$24,000 (for joint filers).
  - The US$4,150 individual exemption for each taxpayer and qualifying dependent was eliminated.
  - The TCJA eliminates various itemized deductions (including for home equity loans, gambling losses, theft or casualty losses, and work-related expenses).
  - Caps and limits:
    - Caps the deduction for state and local taxes at US$10,000.
    - Lowers the cap on mortgage interest deductions to apply only up to US$750,00 in total loans used to buy, build or substantially improve the taxpayer’s main home or second home (previously the cap was US$1 million).
    - Medical expenses in excess of 10 percent of income can continue to be itemized (a 7.5 percent of income limit applies for 2018, as it did for 2017).
  - These changes to deductions and exemptions expire after 2025.
- Appraisal:
  - Replacement of individual exemptions with a higher standard deduction and elimination of various itemized deductions simplify the system and reduce the number of taxpayers itemizing.
  - Caps on state and local tax deduction and mortgage interest deduction are in the direction of staff advice, but could have been more assertive.

### Tax Credits
- Child tax credit:
  - Increased from US$1,000 to US$2,000.
  - Up to US$1,400 of the total credit is refundable (previously the credit was partially refundable, based on income level).
  - Income cut-off for eligibility increased from US$110,000 to US$400,000 for joint filers.
  - These changes expire after 2025.
- Appraisal and suggested modifications:
  - Making the child tax credit fully refundable and phasing it out from a much lower household income level (close to the median income) could increase progressivity and lessen revenue cost.
  - Measures to help cover child and dependent care expenses and expand the Earned Income Tax Credit (EITC) — including to workers without dependents, those under 25, and older workers not yet eligible for social security — could raise labor force participation and aid low- and middle-income families. Revenue costs for such changes are likely to be relatively low.

### The Personal Alternative Minimum Tax (AMT)
- Background and scope:
  - The personal AMT was introduced in 1969 to levy further revenue from wealthy taxpayers who reduced normal PIT liability via itemized deductions.
  - Prior to TCJA, the AMT applied to around 4½ million households, mostly concentrated in those earning between US$200,000 to US$1 million.
  - In 2017 the AMT raised US$38 billion (around 2½ percent of all individual income taxes).
- Changes under TCJA:
  - AMT exemption increased from US$86,200 to US$109,400 for married couples.
  - Threshold where exemption phases out increased from US$160,900 to US$1 million (for married couples).
  - Reduction/elimination of standardized deductions and higher standard deduction mean the PIT is likely to be binding for more taxpayers, significantly reducing the number subject to the AMT.
- Appraisal:
  - Eliminating the AMT could further simplify the system and lower compliance costs; replacing individual exemptions with a higher standard deduction reduces the need for the AMT as a parallel regime.

### Distributional Effects and Appraisal of PIT Changes
- Static cost estimates and distribution:
  - Static costing (JCT 2017) indicates that, in 2019, all income groups will be subject to a lower effective tax rate.
  - The absolute dollar reduction in tax payable increases as income rises, and the proportional reduction also increases with income until the top percentile.
  - Approximately 25 percent of the revenue cost of the personal income tax changes accrues to those making over US$500,000 per year.
  - By 2025, 43 percent of households at the lowest end of the income distribution would face the same or higher tax rate.
- Income trends and equity concerns:
  - Since the last major U.S. tax reform, gains in real incomes have largely accrued to those earning more than 150 percent of the median income.
  - Median household real income in 2016 was only 0.6 percent higher than in 1999; the lowest 40 percent had real incomes lower in 2016 than in 1999.
  - The top 20 percent saw real incomes grow almost 10 times faster than the median over the same period.
- Policy suggestions to improve progressivity:
  - Concentrate tax relief more on those earning close to or below the median income and provide less for those earning above 150 percent of the median income.
  - Eliminate special regimes (including the carried interest provision) to recover lost revenues and improve progressivity.
  - Expand and increase generosity of the EITC; make child tax credit fully refundable and phase it out from a lower income level; provide support for child and dependent care expenses.
  - Full elimination of the AMT could simplify the system and reduce compliance costs.

### Incidence of Business Tax Changes on Households and Labor
- Pass-through entities and business tax context:
  - Around 95 percent of all businesses in the U.S. are constituted as pass-throughs.
  - In 2013, 51 percent of all business income was earned by pass-through entities and more than two-thirds of that income accrued to the top 1 percent of taxpayers.
  - The reduction of the statutory CIT rate to 21 percent could create incentives to reorganize as C-corporations; TCJA mitigates this by creating a deduction for pass-throughs of 20 percent (effectively taxing 80 percent of certain pass-through income).
- Incidence debate:
  - For a small open economy, corporate tax burdens tend to fall on less mobile factors (labor); empirical evidence on tax shifting to labor is contentious.
  - Some estimates for Europe put corporate tax incidence on labor at around 30 percent.
  - The U.S. is not a small economy and extensive nonresident ownership of U.S. corporate equity suggests a considerable part of benefits from lower business taxes may accrue to non-residents.
  - If reform moves the system closer to a rent tax, that would alleviate burden on labor.
  - The extent to which business tax changes benefit workers remains an open question and subject for future research.

### Other Important Provisions of the Act
- Individual Mandate:
  - The individual shared responsibility payment under the Affordable Care Act was the larger of 2.5 percent of annual household income or US$695 per adult and US$347.50 per child.
  - The TCJA eliminates this provision starting in 2019.
  - Appraisal: Elimination is likely to reduce coverage, worsen the average risk of the insured pool, and increase premiums. The CBO estimates the number of people with health insurance would fall by 4 million in 2019, rising to 13 million by 2027, and average premiums in the nongroup market might rise by around 10 percent.
- Carried Interest:
  - The tax reform introduces a minimum holding period of three years for carried interest to be taxed as long-term capital gains but preserves the provision’s thrust.
  - Appraisal: The carried interest provision reduces marginal tax rates for some high-income individuals, creates inequities, and incentivizes recasting labor remuneration as profits interest; income from such activities should be taxed as ordinary income.
- Estate and Gift Taxes:
  - The exemption for the estate, gift, and generation skipping transfer tax is doubled to US$11.2 million per individual (until 2025) and is indexed to inflation beyond that.
  - Appraisal: This provides relief to households with very significant assets (less than 0.2 percent of individuals who die in a year were subject to the estate tax pre-TCJA) and runs counter to targeting tax relief to the middle class; continuation of step-up in basis creates a significant windfall to beneficiaries of wealthy decedents.

*wp18185 - introduction of temporary expensing for a subset of investments. More challenging,*

### 39.6 percent (in the previous regime) to 29.6 percent

### wp18185 - 39.6 percent (in the previous regime) to 29.6 percent

### Pass-through deduction: structure and scope
- The TCJA introduces a 20 percent deduction for qualified pass-through income, reducing the maximum effective rate on qualifying pass-throughs from 39.6 percent (in the previous regime) to 29.6 percent in the new regime.
- Eligibility and phase-out:
  - Deduction is available to all with incomes under certain thresholds (for joint-filers that earn under US$315,000 of taxable income), regardless of their business.
  - For certain “specified services businesses” the 20 percent deduction phases out for joint-filers earning from US$315,000 to US$415,000.
  - “Specified services businesses” include law firms, medical practices, accounting and consulting firms, brokerage services, professional athletes, or any trade or business in which the principal asset is the reputation or skill of one or more of its employees; engineering and architectural services are explicitly excluded.
- Caps on the deduction for non-specified-service businesses:
  - The 20 percent deduction is capped at the lower of 50 percent of the W-2 wages of the firm or 25 percent of the W-2 wages plus 2.5 percent of the value of the undepreciated tangible assets of the business.
  - These limits explicitly do not apply to real estate investment trusts.
- Ambiguity:
  - There is ambiguity on whether or how owners of multiple pass-through entities can aggregate wages and tangible assets across their holdings in calculating the caps on the 20 percent deduction.

### Appraisal: incentives, equity, and complexity
- Comparative effective rates:
  - Maximum effective rate on qualifying pass-throughs: 29.6 percent.
  - Effective rate on distributed corporate profits: 32.85 percent.
  - Top marginal PIT rate: 37 percent.
- Incentive and equity effects:
  - The lower maximum effective rate for pass-throughs creates incentives to recharacterize C-corporation and personal income as pass-through income.
  - Policies create inequities between businesses earning the same income but with different organizational forms or business areas, incentivizing organizational form changes for tax reasons.
  - Incentives exist for some high-income employees to become independent contractors (forming partnerships or sole proprietorships) to reduce tax obligations, potentially eroding both the business and personal income tax bases.
- Guardrails and complexity:
  - The TCJA contains guardrails intended to limit use of the pass-through deduction, but effectiveness is unclear in preventing erosion of the personal income tax base or stopping pass-throughs from redesigning operations to qualify.
  - Guardrail provisions greatly increase complexity and may themselves add to inequities and inefficiencies in tax treatment depending on business nature (e.g., real estate development versus accounting services).

### Policy recommendation on pass-throughs
- Preferential change recommended:
  - It would be better not to have the 20 percent deduction for certain types of pass-through income. This would have:
    - Ensured the highest tax rate for pass-throughs remains above that for distributed corporate profits.
    - Created incentives for a broad range of entities to incorporate as C-corporations.
    - Significantly simplified and made more neutral the treatment of business income.
    - Eliminated the incentive for higher income individuals to become pass-throughs.
- Alternative targeted approach:
  - A deduction could be provided solely for pass-through income that is below a certain threshold, to provide a preferential tax regime for truly small businesses and entrepreneurs.

### International provisions: overview and central changes
- The TCJA introduces marked and novel changes in U.S. interaction with other jurisdictions, centered on five provisions (summary focuses on four highlighted provisions in the source):
1. Elements of territoriality
  - Moves the system—subject to caveats—toward a territorial system, excluding from U.S. taxation the active business income earned abroad, replacing the prior worldwide system with deferral and foreign tax credits.
2. Transition tax on unrepatriated profits
  - Prior behavior led to a substantial stock of unrepatriated earnings in the order of US$2.6 trillion.
  - As a transition measure, TCJA imposes a one-time tax on deemed repatriation:
    - 15.5 percent for funds held in cash or cash-equivalent assets for corporate owners.
    - 8 percent for the remainder.
    - To be paid over the next 8 years.
  - This transition tax represents the only substantial revenue-raising element in the TCJA as described in the source.
3. Global Intangible Low Taxed Income (GILTI)
  - Imposes a minimum tax on overseas income in excess of 10 percent of the return on tangible assets abroad.
  - Key parameters:
    - Taxes at the 21 percent corporate rate the aggregate of controlled foreign corporations’ income in excess of 10 percent of qualified business asset investment, with a deduction for corporate recipients of 50 percent of that income.
    - Credit is given for 80 percent of the foreign tax paid on such income.
    - No deferral of the tax and no link to repatriation of the income.
    - Effectively imposes a minimum rate on GILTI income of 10.5 percent when no tax is paid abroad.
    - U.S. liability is wholly eliminated if the foreign tax on that income is at least 13.125 percent (10.5 percent divided by the 80 percent foreign tax credit).
  - Note on future parameter change:
    - From taxable years starting in 2026, the deductible portion falls to 37.5 percent, and the minimum rate consequently increases to 13.125 percent (and the foreign rate at which U.S. liability is extinguished rises to 16.406 percent).
  - Practical bite:
    - Calculations using aggregate data suggest an average effective GILTI rate relative to foreign pre-tax income of about 2.9 percent and an average foreign tax rate of 7.9 percent; one analysis suggests GILTI may bite for most U.S. multinationals.
4. Foreign Derived Intangible Income (FDII)
  - Domestic corporations receive a 37.5 percent deduction from the corporate tax base for FDII (calculated as income in excess of 10 percent of qualified business asset investment multiplied by the share of foreign-derived income to total income).
  - Effectively reduces the corporate tax rate from 21 to 13.125 percent for qualifying income arising from U.S.-produced goods or services sold to non-U.S. parties to the extent such income exceeds 10 percent of tangible assets.
  - As with GILTI, there is no explicit link with intangible assets.
  - Note on future parameter change:
    - From 2026 on, mirroring the GILTI parameter change, the deductible portion under FDII falls to 21.875 percent (implying an effective rate of 16.406 percent).
  - Applicability:
    - One estimate is that had FDII been in effect in 2014, around 9 percent of all U.S. companies and 13 percent of multinationals would have been eligible for FDII, with a heavy concentration in manufacturing.

*Italic: Content derived from IMF Working Paper wp18185 (excerpt).*

### 5. Base Erosion and Anti-Abuse Tax (BEAT). The TCJA applies an anti- base erosion

### 5. Base Erosion and Anti‑Abuse Tax (BEAT)

### BEAT design and application
- Applies to multinational companies that have annual gross receipts over US$500 million in the preceding 3 years and make certain cross-border payments to affiliates in an amount exceeding 3 percent of their total deductible expenses.
- Targeted payments include interest, royalties, and management fees commonly associated with profit shifting; items characterized as cost of goods sold are excluded.
- BEAT imposes a tax liability equal to the larger of:
  - (i) a tax at 5 percent (this rate rising quickly over time) on a concept of “modified” taxable income that adds back into income those deductions claimed for cross-border payments to affiliates that are not part of the costs of goods sold (essentially encompassing service payments, interest, rents and royalties); or
  - (ii) the regular tax liability (net of tax credits) under the normal corporate income tax base (although with exceptions, until 2025, for R&D credits and some other specific credits).
- The 5 percent BEAT rate: rises to 10 percent for 2019–25, and 12.5 percent thereafter.
- BEAT applies to both U.S. companies and foreign companies with income effectively connected with a U.S. trade or business, but does not cover individuals, S‑corporations, regulated investment companies or real estate investment trusts.
- BEAT contains no test that the outgoing payments will be lightly taxed at the recipient end.

### Appraisal of territorial shift, GILTI, and FDII
- Territoriality aligns the U.S. with the advanced country norm (examples cited: U.K. and Japan), with potential efficiency merits:
  - Restores capital import and ownership neutrality (CIN and CON) by enabling U.S. firms to compete on equal tax terms abroad.
- Territoriality creates inefficiencies through failure of capital export neutrality (CEN) because differences in third countries’ tax rates can distort where U.S. companies operate abroad.
- Deemed repatriation tax on past profits is non‑distortionary but was likely set at too low a rate given federal revenue needs; taxpayers have 8 years to meet that liability.
- Evidence suggests unrepatriated offshore income is often invested in a range of (mostly fixed income) U.S. dollar assets rather than held economically offshore; deemed repatriation is unlikely to create visible international financial market effects or significant capital flows or currency movements.

- GILTI (Global Intangible Low‑Taxed Income):
  - Introduces a minimum tax that ensures such activities pay, somewhere, a tax rate of at least 10.5 percent with no deferral.
  - Core incentive: for operations outside the U.S., firms are pushed toward a low ratio of income (numerator) to tangible assets (denominator).
  - Numerator effect: incentivizes receipt of income in the U.S. rather than abroad, particularly income from intangibles (royalties, similar payments).
  - Denominator effect: incentivizes locating tangible assets outside the U.S., potentially to the extent that associated investments would be unprofitable absent the tax; can make the METR for investment abroad negative.
  - GILTI is more effective where applied jurisdiction‑by‑jurisdiction rather than on the aggregate of activities abroad, because jurisdictional application prevents mixing higher taxed and lightly taxed income via foreign tax credits.

- FDII (Foreign‑Derived Intangible Income):
  - Acts as the mirror image and support of GILTI by establishing a lower tax rate for income derived from transactions with entities or persons abroad.
  - Logic: to provide a carrot (FDII) to complement GILTI’s stick and encourage relocation of intangibles to the U.S. rather than offshoring tangible assets to serve foreign markets.
  - FDII lower tax rate: creates a distortion favoring exports over domestic sales and could be challenged as an export subsidy under the WTO Agreement on Subsidies and Countervailing Measures or as running afoul of the G20‑OECD BEPS minimum standard on harmful tax practices.
  - FDII rate cited in location decision comparison: FDII rate of 13.125 percent applied to excess returns above 10 percent.

### Interaction of provisions and potential consequences
- Combined effect of GILTI, FDII, and BEAT:
  - GILTI ensures a minimum tax on highly mobile intangible returns (threshold referenced: returns in excess of 10 percent of tangible assets).
  - FDII provides preferential taxation to domestic activities serving foreign markets (FDII rate referenced: 13.125 percent on excess returns).
  - BEAT directly targets cross‑border payments associated with profit shifting but may be broader and more aggressive than G20‑OECD BEPS measures.
- Concerns and potential adverse outcomes:
  - BEAT may be punitive for legitimate commercial activities, including in the financial sector, because it lacks a light‑taxed recipient test and covers only cross‑border payments (favoring domestic production).
  - BEAT may incentivize recharacterization of transactions as cost of goods sold or corporate restructuring, including inversion, to avoid its scope.
  - GILTI could increase incentives to invert if it raises U.S. tax payable on foreign earnings for some firms, despite additional TCJA provisions discouraging inversion.
  - FDII may be legally vulnerable and economically distortionary; a less distortive system would eliminate FDII.
  - The complexity and novelty of GILTI, FDII, and BEAT create significant uncertainty; many detailed provisions remain to be defined and firms may adopt a wait‑and‑see approach.

### Tax‑efficient location decision example (tangibles serving foreign markets)
- Decision drivers:
  - If the rate of return on tangibles is less than 10 percent:
    - Choice depends on whether the foreign tax rate exceeds 21 percent; if foreign tax rate > 21 percent, investing in the U.S. is preferred under territoriality.
  - If the rate of return on tangibles is higher than 10 percent:
    - Choice compares:
      - (i) locating at home: paying 21 percent on the portion of the return under 10 percent plus the FDII rate of 13.125 percent on the excess; versus
      - (ii) locating abroad: paying GILTI on the eligible income plus the foreign tax liability.
    - If the excess return is only slightly above 10 percent, the foreign tax rate relative to 21 percent largely determines the preferred location.
    - If the excess return is extremely high, treatment of that excess income becomes the decisive factor.

*Source: wp18185 - 5. Base Erosion and Anti‑Abuse Tax (BEAT).*

### 13.125 percent tax on that income by locating in the U.S. and being taxed under FDII, the

### wp18185 - 13.125 percent tax on that income by locating in the U.S. and being taxed under FDII, the

### Tax‑efficient investment location under Territoriality, GILTI and FDII
- Bold line in Figure 5 shows combinations of the foreign tax rate (TF) and pre-tax return on tangibles (r) at which after-tax returns from investing in the U.S. and abroad are equal, given a domestic tax rate of 21 percent in the latter.
- For r > 0.1 the boundary is defined by:
  - r TF + max{(r − 0.1), 0} = (0.21)[r − 0.375(r − 0.1)]
  - Left term: tax payable under GILTI; right term: tax payable under FDII.
- The bowed boundary implies that the U.S. is preferred for locating investment (and being taxed under FDII at 13.125 percent) unless the foreign tax rate is only very slightly above that level.

### Marginal effective tax rates (METRs) and behavioral implications of FDII and GILTI
- Immediate expensing and FDII:
  - A firm producing only for export and benefiting from FDII today receives a deduction at the FDII rate of 13.125 percent; future cash flows taxed at the same rate.
  - Investing increases the stock of tangible capital to which the benchmark return of 10 percent is applied, mechanically reducing the amount of income subject to the reduced FDII rate and increasing the amount subject to the standard rate of 21 percent.
  - This effect increases tax liability associated with investment, implying overall discouragement to investment (i.e., METR is positive) in many cases.
- METR sign depends on regime when investing (Period 1) and regime when income is received (Period 2); Table 2 summarizes results (details in Appendix I):
  - Period 1 = FDII, Period 2 = FDII: METR = + +
  - Period 1 = Standard regime, Period 2 = FDII: METR = + +
  - Period 1 = FDII, Period 2 = Standard regime: METR = −̶
  - Period 1 = Standard regime, Period 2 = Standard regime: METR = 0
- Overall impression: FDII often creates a disincentive to create tangible assets in the U.S., since a higher stock of such assets reduces FDII income to which favorable treatment applies.
- Under GILTI (considering only U.S. taxes):
  - A higher rate is applied to income in excess of a 10 percent return on tangible capital.
  - A firm in the GILTI regime that expects to remain there gains advantage by locating tangible assets abroad because that increases income excluded from U.S. taxation under GILTI.
  - METR on investing in tangible capital abroad in such a case can be negative.
- Additional complexities and interactions:
  - Locating investments in the U.S. can create BEAT liabilities on internal payments to offshore related parties.
  - Expanding deductible activities in the U.S. could generate enough deductible expenses not subject to the BEAT to eliminate BEAT liability.
  - Limitations on allocating expenses to foreign affiliates for foreign tax credit calculation mean GILTI liability may remain in the U.S. even when the foreign tax rate exceeds 13.125 percent.
  - Calculation of BEAT on gross rather than net ingest raises concerns for financial institutions engaging in large within-group gross flows.

### Macroeconomic effects of the TCJA (model simulations and key projections)
- Simulation approach:
  - DSGE models used to simulate effects of TCJA components.
  - JCT (2017) static costing used as starting point for net impulse and implied changes in effective tax rates for businesses, households and individuals.
- Near‑term GDP level:
  - Collective impact estimated to increase the level of GDP over the near-term by 1.2 percent (by 2020).
  - Much of this effect is cyclical (demand stimulus); modest improvement in potential growth largely from encouraging capital investment.
- Business provisions:
  - Provisions applying to business entities (C-corporations and pass-throughs) expected to have largest effects on output.
  - Combination of lower statutory rate and expensing of capital spending likely to generate most important effects on investment and growth.
- Fiscal multipliers and Table 3 (Fiscal Impact and GDP Level Impact, 2018–2020):
  - Total: Fiscal = −1.2 (percent of GDP), GDP = 1.2, Multiplier = 1.0
  - Corporate and pass-through: Fiscal = −0.5, GDP = 0.9, Multiplier = 1.8
  - Personal: Fiscal = −0.6, GDP = 0.3, Multiplier = 0.4
  - Tax on unrepatriated profits: Fiscal = 0.1, GDP = 0.0, Multiplier = 0.0
  - Tax on foreign profits (territorial): Fiscal = −0.1, GDP = 0.0, Multiplier = 0.0
  - Note: Table reports percent of GDP deviations from pre-tax baseline, and average multiplier (GDP level impact / structural deficit impact).
- Comparison to other models:
  - Estimates parallel those from FRB/US and IMF’s GIMF model.
- Inflation, unemployment and monetary policy:
  - As GDP rises above potential, unemployment is likely to fall further below full employment; more than a decade to converge back to natural rate.
  - This will create upward pressures on inflation requiring the Federal Reserve to raise policy rates at a faster pace to achieve 2 percent PCE inflation and full employment.

### Fiscal outlook and debt implications
- Reduction in tax revenues and looser fiscal policy will raise the primary deficit-GDP of the federal government and put federal debt-GDP on a steeper upward path.
- Figure and table references indicate larger primary deficits and higher federal debt percent of GDP with reform versus without reform.
- Differences with CBO projections:
  - CBO assesses larger and more lasting effect on potential output but smaller cyclical component.
  - CBO’s costing predicts much less reversal of the revenue effect within the 10-year budget horizon than the static JCT assessment used here.

### International spillovers and possible reactions abroad
- Macroeconomic spillovers:
  - U.S. demand stimulus leads to faster U.S. monetary normalization, rise in the US dollar and interest rates.
  - Net effect: higher import growth, increase in U.S. current account deficit to around 3½ percent of GDP by 2019–20, upward pressure on dollar, worsening international investment position.
  - Other systemic economies (largest effects in Canada and Mexico) likely to record larger current account surpluses or smaller deficits; global imbalances expected to rise.
  - Faster Fed tightening could create volatility, tighter global financial conditions, abrupt decompression of term and risk premia, strains on leveraged corporates and households, and adverse effects for borrowers in U.S. dollars, with risk of capital flow reversals to emerging markets.
- Tax-related international spillovers:
  - TCJA effects on investment abroad and profit shifting are major considerations for other countries and could trigger policy responses.
  - Potential net effect: reduction in real investment abroad, more marked in countries with closer ties to the U.S.
  - Beer, Klemm and Matheson (2018) estimates:
    - Median reduction in multinational investment between 1.1 and 2.7 percent of their capital stock (assuming no change in tax rates outside the U.S.).
    - Reduction of 5 to 20 percent in the most affected percentile.
    - Median tax revenue from multinationals estimated to fall by 0.6 to 1.3 percent (and 3 to 21 percent in the top percentile).
  - Three countervailing aspects:
    - Movement toward territoriality reduces U.S. tax charge on foreign profits and could increase U.S. corporations’ investments abroad.
    - GILTI provisions create incentive to locate real investments outside the U.S., potentially reducing investment in the U.S.
    - BEAT may make investing in the U.S. less advantageous versus abroad if it increases tax on cross-border payments.
  - Profit shifting:
    - Large reduction in U.S. statutory rate expected to reduce profit shifting out of the U.S., implying revenue reductions in other countries.
    - Beer, Klemm and Matheson (2018) estimate median revenue loss outside the U.S. of 1.3 to 2.8 percent of revenue from multinationals (assuming unchanged tax rates outside the U.S.).
    - BEAT and GILTI may exacerbate or moderate these effects in various ways.
- Strategic international responses:
  - Countries may respond by adjusting tax rates; strategic interactions matter.
  - Two strategic settings illustrated:
    - U.S. as Stackelberg leader: foreign country reduces tax rate in response to U.S. cut; final reduction in global rates may be smaller.
    - Nash play by U.S. and others: both adjust rates leading to larger global reductions; new equilibrium potentially yields greater tax competition.
  - The magnitude of global rate reductions depends on responsiveness of tax rates across countries; Beer, Klemm and Matheson (2018) provide central estimates under different strategic assumptions.

*wp18185 - 13.125 percent tax on that income by locating in the U.S. and being taxed under FDII, the*

### 3.8 percentage points. They further estimate that (notwithstanding the dampening of

### VIII. CONCLUDING REMARKS

### Impact on international tax competition and revenue
- The additional reduction in median revenue from multinationals is estimated to be in the order of 3 to 7 percent.
- An illustrative strategic scenario: if the U.S. plays Nash (within the Beer, Klemm and Matheson (2018) setting), rates abroad fall by 4.6 points while the U.S. rate falls by 16.8 points instead of the 14 points of the TCJA.
- Doubts over the form of strategic interactions in tax-setting are a significant source of uncertainty in assessing the impact of the TCJA on competition in tax rates.

### Territoriality, FDII, GILTI and implied foreign rate ranges
- Move towards territoriality changes incentives: historically, foreign countries could tax at up to the U.S. statutory rate without affecting total tax paid by investors, but deferral blunted this effect.
- Under FDII considerations from a foreign government’s perspective:
  - Setting a tax rate above 21 percent is unattractive because U.S. corporations will prefer to produce in the U.S.
  - U.S. firms producing abroad for export would take advantage of FDII if their return on tangibles is above 10 percent and relocate to the U.S. as a base for exports.
  - If there is only one foreign country, there is little point in setting a tax rate below 13.125 percent, since 13.125 percent is the best available to an export-oriented U.S. corporation if it were to locate in the U.S.
  - The expectation might thus be, in broad terms, of a foreign tax rate being set between 13.125 and 21 percent.
  - By the same logic, between 16.406 and 21 percent from 2026.
- Interactions among many foreign jurisdictions can change incentives:
  - One jurisdiction setting 13.125 percent may be undercut by another setting zero, creating a total rate faced by the U.S. corporation of 10.5 percent rather than 13.125 percent.
  - A jurisdiction may lower its statutory rate below 13.125 percent without triggering any GILTI liability for the U.S. multinational, particularly if investments exist in jurisdictions with higher tax rates.
  - Such reductions in tax payable by the U.S. corporation are fairly modest.
- Upward pressure on rates in low-tax jurisdictions could spill over benefits to other countries affected by profit shifting, which could limit downward pressure.

### Structural reform implications and policy responses
- The structural reforms introduced by the TCJA are likely to have profound and subtle implications for the wider international tax regime; they do not equate simply to intensified rate competition.
- Countries might adopt schemes that vary the tax rate with the return on tangible investments, counteracting the manner in which GILTI and FDII favor locating intangibles in the U.S.
- Countries have many instruments beyond the statutory rate to respond; broadly they face:
  - Potentially increased outward profit shifting.
  - Potential disincentives to real investment by U.S. corporations.
- Heterogeneity across countries:
  - Many low-tax jurisdictions may not plausibly host significant real investments; their business model may be based on attracting intangibles.
  - More advanced economies may face both inward profit-shifting pressures and opportunities to reduce tax burdens on intangible assets.
- The TCJA feeds into and may reshape the wider debate on the international tax system, including:
  - GILTI as a creative approach to taxing income associated with intangibles; other countries may create analogous provisions.
  - Possible adoption of modified BEAT-like measures by other countries as a response to base erosion and profit shifting.
- The fundamental problems of the international system remain unresolved, notably difficulties associated with implementing arms-length pricing and the challenges posed by digitalization and arguments for destination-based taxation.

### Fiscal, distributional and domestic policy takeaways
- Domestically, elements of the TCJA (reducing marginal rates under the PIT, broadening base elements, accelerating depreciation) resemble changes seen elsewhere and generally reduce inefficiencies.
- Reductions in the CIT rate and elements of territoriality restore U.S. norms seen elsewhere, while elimination of the corporate AMT and reduced scope of itemized deductions simplify the system somewhat.
- The reform is multi-faceted and leaves considerable uncertainty about future system design and international reactions.
- Broad conclusions highlighted:
  - The reform could have been more effectively structured to achieve the stated goal of supporting the middle class.
  - The TCJA takes on sources of distortion but does not fully resolve them: formulaic approaches (tightening arbitrary earnings-based limits, adopting a 10 percent return on tangibles) reflect unresolved underlying problems of debt bias and profit shifting.
  - The large fiscal cost of the reform leaves open the possibility that substantial additional tax or spending measures may be needed to restore the fiscal position; at that point, other tax measures not considered in the TCJA—such as the adoption of a federal VAT, carbon taxation, or an increase in the gasoline tax—may re-enter the debate.

### Appendix I — METR results for FDII and GILTI (selected analytical findings)
- Setup highlights:
  - Firm undertakes an equity-financed tangible investment I at time 0, immediately expensed, sells remaining (1−δ)I at time 1.
  - Indicator μt = 1 if firm faces reduced FDII rate τF, and 0 if it faces standard rate τ; rate faced in period t is τt* = μt τF + (1−μt) τ.
  - Additional tax paid in period 0: −τ0* I.
  - Additional tax in period 1 simplifies to τ1*[F(I)+(1−δ)I] + μ1(τ−τF)(0.1)(K+I).
  - After-tax profit Π(I) = −(1−τ0*)I + 1/(1+r){(1−τ1*)[F(I)−(1−δ)I] − μ1(τ−τF)(0.1)I}; r>0 is required return on equity.
  - Wedge Θ ≡ F′ − r − δ = (τ1* − τ0*)(1 + r) + μ1(0.1)(τ − τF) / (1 − τ1*).
- Four cases and Θ signs:
  - Case 1 (FDII in both periods: μ0=μ1=1; τ0*=τ1*=τF):
    - Θ = (τ − τF)(0.1) / (1 − τF) > 0.
  - Case 2 (FDII in period 0, standard in period 1: μ0=1, μ1=0; τ0*=τF, τ1*=τ):
    - Θ = (τ − τF)(1 + r) / (1 − τ) > 0.
  - Case 3 (Standard in both periods: μ0=μ1=0; τ0*=τ1*=τ):
    - Θ = 0.
  - Case 4 (Standard in period 0, FDII in period 1: μ0=0, μ1=1; τ0*=τ, τ1*=τF):
    - Θ = −(τ − τF)(r + 0.9) / (1 − τF) < 0.
- METR for GILTI:
  - Assuming no foreign taxes and setting τ = 0, the sign pattern in the analogous matrix for GILTI is the precise opposite of that for FDII.

*Source: IMF Working Paper wp18185 — https://www.imf.org/-/media/files/publications/wp/2018/wp18185.pdf*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp18185.pdf_