NCPA - National Center for Policy Analysis

Simulating Corporate Income Tax Reform Proposals with a DCGE Model

September 30, 2015

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

As tool for the NCPA's Tax Analysis Center, this model measures the effect of tax policy changes on all moving parts of the economy. For example, dynamic modeling can show potential unintended negative consequences of tax increases to employment, GDP growth and capital formation.

The current United States corporate tax rate, the highest in the developed world, sends jobs overseas and reduces wages of American workers. But the NCPA's DCGE model reveals that a hypothetical 50% reduction in the corporate tax rate would have the following results:

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

In the end, high corporate taxes do not affect only the rich, they are passed on to workers in the form of lower wages.

Source: K. Bhattarai, J. Haughton, M. Head and D.G. Tuerck, "Simulating Corporate Income Tax Reform Proposals With a DCGE Model," National Center for Policy Analysis/Beacon Hill Institute, September 29, 2015.

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