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Dynamic Macroeconomic Estimates of the Effects of Chairman Camp's 2014 Tax Reform Discussion Draft

In response to widespread concerns that the income tax system in the United States is highly inefficient, unfair, unnecessarily complicated, and discourages economic growth while putting US multinational companies at a disadvantage relative to their foreign competitors, numerous proposals for sweeping reforms have been advanced in recent years. The most recent is the comprehensive discussion draft for reform of the business and individual income tax systems released by Representative Dave Camp, Chairman of the House Ways and Means Committee. The Camp discussion draft follows in the long tradition of base-broadening, rate-reducing reforms that finance reductions in corporate and individual income tax rates with the elimination of a wide variety of tax expenditures.

Such proposals have a broad range of complex and interacting effects on the performance of the US economy. One commonly used way to investigate the net results of all of these interactions, including their dynamic effects on economic growth and other macroeconomic variables, is to simulate them within the context of a dynamic computable general equilibrium model. In this report, we present the results of such a simulation, using the Tax Policy Advisers Model.

The simulation suggests that implementing the proposals of the Camp discussion draft would have positive net effects on the macroeconomic performance of the economy. For example, the simulation suggests that the level of real GDP would be 2.2 percent higher ten years after enactment of reform and 3.1 percent higher in the long run. These increases are attributable to many factors, including a significant reallocation of firm-specific capital that earns above normal economic rents to the United States and a sizable reversal of income shifting, as well as modest increases in labor supply and larger increases in labor compensation. The gains from reform are sufficiently large that if all the resulting revenues were devoted to further reductions in the corporate income tax rate, that rate could decline to roughly 20 percent in the long run.

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