A dynamic general equilibrium analysis of corporate tax integration

Abstract

The objective of this article is to study the intersectoral and intertemporal efficiency effects as well as the distribution effects of integrating corporate and personal income taxes. This article presents a dynamic general equilibrium model of the U.S. economy. The model accomodates optimal intertemporal investment decisions and optimal allocation of investment across sectors, intertemporal household consumption/savings and labor/leisure decisions, and government deficits and financial crowding-out. Simulation results suggest that the elimination of the corporate income tax and its replacement by increased personal income tax rates would yield long-run benefits that are at best 17 percent of the present value of future consumption and leisure. Also, the average long-run gains are more than three times as large as the average short-run gains: it takes time for the efficiency gains of integration to emerge. Finally, integration is shown not to be a Pareto improvement in that low-income households are worse off after integration.