Corporate Tax Reform: From Income to Cash Flow Taxes

By Benjamin Carton, Emilio Fernández Corugedo, Benjamin L Hunt

January 16, 2019

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Benjamin Carton, Emilio Fernández Corugedo, and Benjamin L Hunt. Corporate Tax Reform: From Income to Cash Flow Taxes, (USA: International Monetary Fund, 2019) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper uses a multi-region, forward-looking, DSGE model to estimate the macroeconomic impact of a tax reform that replaces a corporate income tax (CIT) with a destination-based cash-flow tax (DBCFT). Two key channels are at play. The first channel is the shift from an income tax to a cash-flow tax. This channel 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. The second channel is the shift from a taxable base that comprises domestic and foreign revenues, to one where only domestic revenues enter. This leads to an appreciation of the currency to offset the competitiveness boost afforded by the tax and maintain domestic investment-saving equilibrium. The paper demonstrates that spillover effects from the tax reform are positive in the long run as other countries’ exports benefit from additional investment in the country undertaking the reform and other countries’ domestic demand benefits from improved terms of trade. The paper also shows that there are substantial benefits when all countries undertake the reform. Finally, the paper demonstrates that in the presence of financial frictions, corporate debt declines under the tax reform as firms are no longer able to deduct interest expenses from their profits. In this case, the tax shifting results in an increase in the corporate risk premia, a near-term decline in output, and a smaller long-run increase in GDP.

Subject: Cash-flow tax, Corporate income tax, Corporate taxes, Economic theory, Financial frictions, Taxes, Value-added tax

Keywords: 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

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/013
Stock No:

WPIEA2019013
ISBN:

9781484390085
ISSN:

1018-5941

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