Corporate Tax Reform: From Income to Cash Flow Taxes
IMF Working Papers, January 16, 2019
Source details
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- Corporate Tax Reform: From Income to Cash Flow Taxes
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Bibliographic details
- Authors: Benjamin Carton, Emilio Fernández Corugedo, Benjamin L Hunt
- Published: January 16, 2019
- Series: IMF Working Papers
Model and key channels
- Uses a multi-region, forward-looking, DSGE model to estimate the macroeconomic impact of a reform replacing a corporate income tax (CIT) with a destination-based cash-flow tax (DBCFT).
- Two key channels are at play:
- Shift from an income tax to a cash-flow tax: induces the corporate sector to invest more, boosting long-run potential output, GDP and consumption, but crowding out consumption in the short run as households save to build up the capital stock.
- Shift from a taxable base that comprises domestic and foreign revenues to one where only domestic revenues enter: leads to an appreciation of the currency to offset the competitiveness boost afforded by the tax and maintain domestic investment–saving equilibrium.
Macroeconomic impacts and dynamics
- Short-run effects:
- Consumption is crowded out as households increase saving to build capital.
- In the presence of financial frictions, tax shifting can increase corporate risk premia and produce a near-term decline in output.
- Long-run effects:
- Higher corporate investment raises long-run potential output, GDP, and consumption.
- Currency appreciation offsets competitiveness gains from the destination-based tax, affecting trade-adjustment dynamics.
International spillovers and multilateral adoption
- Spillover effects:
- Positive in the long run: other countries’ exports benefit from additional investment in the reforming country.
- Other countries’ domestic demand benefits from improved terms of trade resulting from the reforming country’s adjustments.
- Multilateral reform:
- There are substantial benefits when all countries undertake the reform, amplifying positive long-run effects across countries.
Financial frictions and corporate leverage
- When financial frictions are present:
- Corporate debt declines under the tax reform because firms are no longer able to deduct interest expenses from their profits.
- Tax shifting raises corporate risk premia.
- These forces combine to reduce near-term output and produce a smaller long-run increase in GDP compared with the frictionless case.
Subject focus and keywords
- Subject: Cash-flow tax; Corporate income tax; Corporate taxes; Economic theory; Financial frictions; Taxes; Value-added tax
- Keywords include: business taxation; capital stock; cash flow; Cash-flow tax; CIT reform; Corporate income tax; corporate leverage; Corporate taxes; cost of capital; DBCFT result; distortionary tax; dynamic stochastic general equilibrium models; exchange rate; export price; Financial frictions; Global; income tax; macroeconomic interdependence; open economy; rate of return; return to capital; shadow price; tax policy; tax reform experiment; Value-added tax; WP
IMF Working Paper summary: "Corporate Tax Reform: From Income to Cash Flow Taxes" by Benjamin Carton, Emilio Fernández Corugedo, and Benjamin L Hunt, January 16, 2019.
Content in this bundle
- Corporate Tax Reform: From Income to Cash Flow Taxes, WP/19/13, Janaury 2019