Lecture Notes in Economics and Mathematical Systems 601

Transcription

1 Lecture Notes in Economics and Mathematical Systems 601 Founding Editors: M. Beckmann H.P. Künzi Managing Editors: Prof. Dr. G. Fandel Fachbereich Wirtschaftswissenschaften Fernuniversität Hagen Feithstr. 140/AVZ II, Hagen, Germany Prof. Dr. W. Trockel Institut für Mathematische Wirtschaftsforschung (IMW) Universität Bielefeld Universitätsstr. 25, Bielefeld, Germany Editorial Board: A. Basile, A. Drexl, H. Dawid, K. Inderfurth, W. Kürsten, U. Schittko

2 Doina Maria Radulescu CGE Models and Capital Income Tax Reforms The Case of a Dual Income Tax for Germany With 33 Figures and 34 Tables 123

3 Dr. Doina Maria Radulescu Center for Economic Studies (CES) University of Munich Schackstraße Munich Germany Doina.Radulescu@ces.vwl.uni-muenchen.de Library of Congress Control Number: ISSN ISBN Springer Berlin Heidelberg New York This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. Springer is a part of Springer Science+Business Media springer.com Springer-Verlag Berlin Heidelberg 2007 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Production: LE-TEXJelonek, Schmidt &Vöckler GbR, Leipzig Cover-design: WMX Design GmbH, Heidelberg SPIN /3180YL Printed on acid-free paper

4 To my parents, Mariana and Andrei

5 Foreword Capital income taxation is a complicated issue because of the general equilibrium implications these taxes have with regard to the intersectoral and intertemporal allocation of economic resources. Together with Michael Stimmelmayr (CES, Munich) and Christian Keuschnigg (IFF, St. Gallen), Doina Radulescu from the Ifo Institute for Economic Research has designed a complex and particularly elegant intertemporal general equilibrium model of the economy, called IfoMod. IfoMod makes it possible to calculate the welfare gains and losses from fundamental tax reforms in present value terms. One of the tax reforms Doina Radulescu analyses is the move towards a dual income tax, as is used in some Scandinavian countries. She analyses this tax using German data, because it was recently proposed, among others, by the German Council of Economic Advisors. In the meantime, IfoMod has become a standard tool for the Ifo Institute. According to the Council of Economic Advisors, it is not only stateof-the-art, but one of the world s most developed and advanced CGE models for the purpose of analysing intertemporal allocation problems in growing economies. Hans-Werner Sinn

6 Preface This book was written during my time acting as a PhD candidate in the Public Finance Department at the Ifo Institute for Economic Research in Munich. First and foremost I would like to thank my supervisor Hans-Werner Sinn, University of Munich and President of the Ifo Institute. He was the first one to raise my interest in capital income taxation and continued to stimulate my proccupation for this topic over the last years. I am particularly grateful to him for all the things I ve learnt. I am also very much indebted to my second supervisor, Christian Keuschnigg from the University of St. Gallen who led me to the field of CGE modelling and kindly accompanied my work step-by-step with very competent advice and patience. I enjoyed working with both professors and feel very lucky to have had the opportunity to have conducted a thesis on such an interesting and up-to-date policy issue. Just as much I would like to thank Assaf Razin for the insightful comments which he provided during my research visit at Tel Aviv University. Furthermore, I am also particularly thankful to Peter Birch Sørensen from the University of Copenhagen, who made crucial suggestions for enhancing thequalityofmyworkespeciallyduringthefinalphaseofmythesis. I also benefited from the helpful comments made by Wolfgang Wiegard, Søren Bo Nielsen and Bernd Genser, while visiting various seminars and international conferences. I should not forget to mention my colleague Michael Stimmelmayr at CES whose continuous motivation was of particular support. The realization of this project would not have been possible without the kind support of my colleagues and friends at Ifo to which I am particularly grateful especially to Chang Woon Nam and Rüdiger Parsche. Last but not least I would like to thank my parents at home in Romania. Without their support and encouragement it would have been simply impossible to complete this thesis. This is the reason why I would like to dedicate this thesis to them. München, August 2007 Doina-Maria Rădulescu

7 Contents 1 Introduction Why Does Germany Need a Reform of Capital Income Taxation? TheGermanTaxSystemofCorporateTaxation The German Tax Reform Theoretical and Empirical Arguments for Lower Capital IncomeTaxation Germany s Declining Economy and the Increasing Tax CompetitionintheEU The Non-Transparent and Complicated German Tax System DecreasingRevenuesFromCorporateTaxes Summary The Dual Income Tax DefinitionandMainFeaturesoftheDualIncomeTax TheCaseforaDualIncomeTax The DIT and the Basic Principles of Taxation: EfficiencyandEquity AdministrativeSimplicity RevenueAspects TheExperienceofNordicCountries Denmark Finland Norway Sweden Problems Related to the DIT Implementation Difficulties Arising from the Separation of Labor and CapitalIncome SolutionsAppliedbytheNordicCountries ConcreteProposalsforGermany... 47

8 X Contents Main Features of a DIT System as Proposed by the GCEA (2003) The DIT Proposal of Sinn (2003a) Summary Appendix-AReformProposalforSwitzerland The Model Overview of Different CGE Models and Their Characteristics TheModel BusinessSector Stylized Analysis of Tax Policy and Effective Marginal Tax Rates HouseholdsandGeneralEquilibrium General Macroeconomic Equilibrium Welfare Analysis and the Marginal Excess Burden of Taxes RestoftheWorld Simulation Results ModelCalibration ProductionTechnologyParameters MacroeconomicData TheMarginalExcessBurden Implementing a DIT as Suggested by the GCEA (2003) Partial Analysis of the Effects of Each Individual Tax Rate Change Steady State Comparisons of the Overall Reform Package TransitionPaths Implementing a DIT as Suggested by Sinn (2003a) Steady State Comparisons TransitionPaths TheTwoProposalsCompared SensitivityAnalysis Conclusion Appendix A Appendix B Appendix B.1 Hayashi s Proof Appendix B.2 Intertemporal Optimization of Domestic Households...145

9 Contents XI Appendix B.3 Walras Law Appendix B.4 Savings Investment Identity Appendix C Functional Forms Appendix C.1 Trend Growth Appendix C.2 Factor Demands Appendix C.3 Adjustment Cost Function Appendix C.4 Agency Cost Function Appendix D Computational Strategy References...161

10 List of Figures 2.1 GDP Growth Rates in Selected EU Countries GDPGermanGrossInvestmentinPlantandMachinery Cross-Country Comparison of Statutory Effective Tax Rates (2005) Statutory Tax Rates on Corporate Profits and Effective Average Tax Rates in the New EU Member States (2004) EvolutionofperCapitaCorporateTaxRevenue EvolutionofLocalTradeTaxRevenueandTaxMultiplier Tax Wedge and Welfare Costs: The Case of a Small Open Economy Tax-Cut-Cum-Base-Broadening Reform for a Country RunningaCurrentAccountDeficit Personal Income Tax Schedule 2005 versus Reform Proposals; Marginal Rates EMTRs Before the Reform and After Implementing the GCEA (2003) or Sinn (2003a) Proposal EMTRBeforeandAfterIntroducingtheSDIT InvestmentDynamics The Effect of a Reduction in the Corporate Tax Rate Effect of an Increase in the Capital Gains Tax on the Optimal DebtAssetRatio TheEffectofTaxAllowancesonInvestment TaxWedgesandAssetReturns The Marginal Effective Tax Rate PortfolioAllocationofDomesticHouseholds PortfolioAllocationofForeignHouseholds TheEquivalentVariation... 89

11 XIV List of Figures 5.1 The Transition Path of Capital and Labor Supply From Each Tax Rate Change The Transition Path of Consumption and Net Foreign Assets Resulting From Each Tax Rate Change Transition Path of the Capital Stock in Scenarios 1 to Transition Path of Labor Demand in Scenarios 1 to TheTransitionPathofGDP,CapitalandLaborSupply The Transition Path of Consumption and Net Foreign Assets The Transition Path of Transfers and VAT Rate TheTransitionPathofCapitalandLaborDemand TheTransitionPathofGDP,CapitalandLaborSupply The Transition Path of Consumption and Net Foreign Assets The Transition Path of Transfers and VAT Rate The Transition Path of GDP, Capital and Labor Supply under thetworeformproposals The Transition Path of Consumption and Net Foreign Assets under the GCEA (2003) and under the Sinn(2003) Proposal The Transition Path of Transfers and of the VAT Rate under the GCEA (2003) or under the Sinn (2003a) Proposal...133

12 List of Tables 2.1 Personal Income Tax Rates Before and After the Reform Effective Statutory Tax Rates Before and After the Reform Statutory Tax Rates for Corporate and Non-corporate Firms Treatment of Patient vs. Impatient Consumers Under the Global and Under the Dual Income Tax (in ) Investment in Human versus Physical Under the Dual Income Tax (in ) Marginal Income Tax Rates in the Nordic Countries Before andafterthefirstmajortaxreforms(in%) Statutory Tax Rates and Taxation Rules in the Nordic Countries 2004 (in %) OverviewofDifferentCGEModelsandTheirFeatures TaxesandTaxFactors AssetTypesandTheirReturns BehavioralParameterValues Macroeconomic Variables (in bill. ) The Marginal Deadweight Loss From Each Particular Tax UnderthePresentTaxSystem(in%) Tax Rates Before and After the Reform Anticipated Effects of Individual Tax Reform Measures (in%) Anticipated Effects of Individual Tax Reform Measures (in%) Key Economic Figures (Long Run Change in %) AnticipatedEffectsoftheReformPackage TheCostofCapitalandMarginalEffectiveTaxRates Key Economic Figures (Long Run Change in %) Anticipated Effects of the Reform Package (Long Run Change in%) Key Economic Figures (Long Run Change in %)...111

13 XVI List of Tables 5.13 Tax Rates Before and After the Reform AnticipatedEffectsoftheACNE Key Economic Figures (Long Run Change in %) AnticipatedEffectsoftheReformPackage TheCostofCapitalandMarginalEffectiveTaxRates Key Economic Figures (Long Run Change in %) Anticipated Effects of the Reform Package (Long Run Change in%) Key Economic Figures (Long Run Change in %) The Cost of Capital and the Change in Welfare Resulting FromImplementingtheTwoReformAlternatives Sensitivity Analysis (Long Run Changes in %) Sensitivity Analysis (Long Run Changes in %)