The international spillover effects of United States tax reform: A computational general equilibrium approach with a global trade model

I integrate trade modeling and tax modeling, by evaluating the international spillover effects of changes in U.S. tax policy. I use both static and dynamic computational general-equilibrium models that divide the world into four regions. The data are from Global Trade Analysis Project for 1995. My model incorporates a labor/leisure choice and international cross-ownership of assets. My simulations suggest that unilateral elimination of U.S. capital taxes generates capital inflows. This policy change encourages more efficient use of the capital stock, but it will also generate negative effects on the terms of trade. Overall, the policy change generates welfare gains for the United States. If the other regions do not respond to the U.S. policy change, they suffer welfare losses. However, if all regions eliminate capital taxes, welfare gains accrue for the entire world. The analysis of welfare gains for the United States indicates that unilateral elimination of U.S. capital taxes yields an annual static welfare gain of around {dollar}98 billion in 1995 dollars (which amounts to 1.4 percent of GDP), while it yields dynamic gains, whose present values are around {dollar}4.0–{dollar}4.1 trillion (which amount to 2.2 percent of GDP stream).