Static: Corporate and International
Unfortunately, there is no available microdata for business entities. PWBM uses the aggregate SOI data to forecast the line items on business tax forms. These forms include the various 1120s as well as the 1065 and the associated schedules. For pass-through entities (1065, 1120-S, 1120-REIT, 1120-RIC), the aggregate amounts are shared out to ultimate taxpayers when the data is available. PWBM also splits the aggregate data by industry for 1120 filers excluding REITs, RICs and S corporations. The data is available from the IRS tax stats website.
Corporate income tax is simulated based on a single representative corporation. The total liability is calculated by populating the representative 1120 with SOI aggregate totals. PWBM-TM is dependent upon supporting models to forecast major deductions and to approximate heterogeneity.
An important aspect of the corporate model is the benefit of depreciation. PWBM uses a model that forecasts the usage of 15 different classes of investments with differing depreciation schedules. The corporate tax module uses this model to adjust the amount of depreciation deductions as the incentives for investment change. For example, under a temporary expensing provision, the expectation is that corporations would move investment corporations would have undertaken in later years into years where immediate expensing is allowed. The amount of timing shift is estimated by PWBM using historical data.1
Net Operating Losses (NOLs)
NOLs are also an important aspect of the corporate tax code because it allows corporations to smooth income across a number of years (two years back and up to 20 years forward). As such, it is important to model the use of NOLs. In modeling the use of NOLs, PWBM relies upon the literature on the differential tax treatment of losses for corporations.2 PWBM uses the analysis in the literature to model limitations on the use of NOLs.3
PWBM forecasts other deductions on the 1120 by estimating the relationship between the deductions and macroeconomic variables forecasted by PWBMsim. These deductions include the net interest and the research and experimentation deductions among others.
Effective Tax Rates
PWBM’s corporate tax module produces average effective tax rates (ETR) by industry for current law and proposed law for C corporations. To calculate these effective rates by industry, the model distributes projections of income and expenses across industries. The industry shares are calculated from aggregate data on certain tax items by industry. The industry income and expense amounts are then used to populate a simplified version of PWBM-TM since not all aspects of the corporate tax code can be modeled at the industry level given data limitations. This methodology does quite well in forecasting historical industry effective rates. However, the effective tax rates for industries with small amounts of taxable income are generally less accurately predicted since small prediction errors in either tax liability or taxable income can have large effects on the effective tax rate of these industries.4
International Income Shifting
The modeling of international income shifting is not unlike the modeling of organizational form shifting mentioned above and described in detail here with the relevant tax rate comparison between the U.S. and a worldwide rate. The economics literature has produced a number of semi-elasticities for the relationship between profits and tax rates of foreign countries. PWBM uses an elasticity in the middle of the range of estimates (0.8) to calibrate the corporate tax module.5 As the U.S. corporate tax rate falls/increases, the model increases/decreases the amount of corporate income on the representative 1120. This change in income represents both repatriation of income by U.S. multinationals and increased investment by foreign multinationals (1120-F).6
The analysis PWBM performed also benefited greatly from conversations with Matthew Knittel and from the work of Kitchen and Knittel (2016): https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-110.pdf. ↩
See “The Implications of Tax Asymmetry for U.S. Corporations,” Michael Cooper and Matthew Knittel, National Tax Journal, March 2010, 63(1), 33-62 for a full discussion of the relevant literature. ↩
PWBM benefited greatly from conversations with Matthew Knittel of Pennsylvania’s Independent Fiscal Office as well as Treasury experts. ↩
This module also does not reflect industry-specific factors. ↩
See Dowd, Tim and Landefeld, Paul and Moore, Anne, Profit Shifting of U.S. Multinationals. Journal of Public Economics. 2/2017. ↩
PWBM is unable to distinguish due to lack of data. ↩