New Model Could Capture True Impact of Tax Policy Changes: NCPA Analysis

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New NCPA/Beacon Hill Model Shows Reductions in Corporate Tax Rate Would Boost Investment, Incomes

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The misperception is that high corporate tax rates only affect the rich, but since taxes paid by firms are passed on to workers in the form of lower wages, employees at all earning levels suffer, particularly the lowest-skilled workers.

In partnership with the National Center for Policy Analysis (NCPA), Beacon Hill Institute has unveiled its dynamic computable general equilibrium (DCGE) model, which measures the impact of tax changes on economic variables such as capital stock, employment and wages.

"Unlike static models, a dynamic model measures the effect of tax policy changes on all the important variables that measure economic activity. For instance, while raising the tax rate on income would, in and of itself, bring in more income-tax revenue, it would also reduce the amount of income to be taxed and, with it, investment, jobs and tax revenues from other sources such as sales and excise taxes,” said David G. Tuerck, executive director of the Beacon Hill Institute at Suffolk University in Boston. “That’s why dynamic modeling is so much more useful than static modeling, which takes none of these factors into account."

Dr. Tuerck presented results of the model yesterday at a Congressional briefing in Washington, D.C., and will also present his findings at the upcoming International Atlantic Economic Society Conference in Boston.

It is no secret that the U.S. corporate tax rate — now the highest in the developed world — sends jobs overseas and reduces wages of American workers. However, the first results from the NCPA-DCGE model show that a hypothetical 50 percent reduction in the corporate tax rate would, over a 25-year period:

  • Increase real GDP by 1.6 percent in the first year, and by 4.3 percent in the 25th year of implementation.
  • Increase investment 7.2 percent in the first year and by 8.1 percent in the 25th year.
  • Increase employment 2.9 percent in the first year and 3.5 percent in the 25th year.
  • Increase income for all earners, with the lowest 10 percent of earners seeing the largest percentage increase in the first year.

"The misperception is that high corporate tax rates only affect the rich, but since taxes paid by firms are passed on to workers in the form of lower wages, employees at all earning levels suffer, particularly the lowest-skilled workers," says Pamela Villarreal, project manager for the NCPA's Tax Analysis Center.

Simulating Corporate Income Tax Reform Proposals With a DCGE Model: http://www.ncpa.org/pub/simulating-corporate-income-tax-reform-proposals-with-a-dcge-model

The National Center for Policy Analysis (NCPA) is a nonprofit, nonpartisan public policy research organization, established in 1983. We bring together the best and brightest minds to tackle the country's most difficult public policy problems — in health care, taxes, retirement, education, energy and the environment. Visit our website today for more information.

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Catherine Daniell
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