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International Monetary Fund. European Dept.

approximately 0.7 and 1.1 percent of GDP, respectively. Clearly, these are still sizable revenue losses. Moreover, if base broadening measures are adopted to compensate for this revenue loss, these themselves might induce opposing dynamic effects by exacerbating the distortionary impact of the CIT. Caution is therefore required in allowing dynamic scoring effects to analyze the revenue implications of reform. 27. Any CIT reform would also need to consider effects on tax neutrality, with a view to limiting distortions and tax arbitrage . Figure 7 shows what would happen

Ruud A. de Mooij and Ikuo Saito
This paper explores how corporate income tax reform can help Japan increase investment and boost potential growth. Using international and Japan-specific empirical estimates of corporate tax elasticities, investment is predicted to expand by around 0.4 percent for each point of rate reduction. International consensus estimates suggest further that between 10 and 30 percent of the static revenue loss could be recovered in the long run through dynamic scoring, although Japan’s offset may be closer to the lower bound. Compensating fiscal measures are necessary in light of Japan’s tight fiscal constraints. The scope for base broadening in the corporate income tax is found to be limited and some forms of base broadening will undo positive investment effects of a rate cut. Alternative revenue sources include higher consumption and property taxes. A gradual approach toward lowering tax rates mitigates windfall gains and reduces short-run revenue costs. An incremental allowance-for-corporate-equity system could boost investment with limited fiscal costs in the short run.
Benjamin Carton, Emilio Fernández Corugedo, and Mr. Benjamin L Hunt
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.
Benjamin Carton, Emilio Fernández Corugedo, and Mr. Benjamin L Hunt

Front Matter Page Research Department Contents I. Introduction II. Prior Studies on CIT Reforms in General Equilibrium Models III. On the desirability of (Destination Based) Cash-Flow Taxes: Intuition A. Capital Market Distortions B. Labor Market Distortions C. Export and Import Price Distortions IV. Tax Reform Scenarios A. Scenario 1: Replacing a CIT by a CFT (No financial Frictions) B. Scenario 2: Replacing a CIT by a DBCFT (No financial Frictions) C. Scenario 3: All Countries Replacing a CIT by a DBCFT (No financial Frictions

Ruud A. de Mooij and Ikuo Saito

Corporate Tax Cut A. Signs of Laffer Effects? B. Fiscal Impact Using the Elasticity of Taxable Income C. General Equilibrium Effects V. CIT Reform Options for Japan A. Timing B. Revenue-neutral Reform Away from CIT C. CIT Base Broadening and Rate Reduction D. Allowance for Corporate Equity VI. Conclusions Tables 1. Statutory Corporate Income Tax Rate in Japan, as of April 2014 2. Summary of Estimated Effects of Lower CIT Rate by 1 Percent of GDP Figures 1. Statutory General Government CIT Rates 2. Effective Marginal and Average