On the corporate tax reform: Coordination and trade-offs

Abstract

The enactment of the Tax Cuts and Jobs Act in 2017 in the US, specifically the large tax cut provision for corporate businesses is a major overhaul since the Tax Reform Act of 1986. However, the reform is not revenue neutral. This paper assesses the revenue-neutral trade-offs when the government finances a corporate tax cut using labor income tax, dividend tax, and capital gains taxes as instruments. I construct a parsimonious general equilibrium model to derive the balanced fiscal multipliers associated with a corporate tax reform. Using a standard calibration, I show that both labor income tax and dividend tax multipliers are negative, suggesting a trade-off between a corporate tax cut and these two tax rates. On the other hand, the multiplier related to the capital gains tax is positive, which predicts a coordination of a double cut in both corporate and capital gains tax rates.