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. PWBM utilizes the available SOI data to distinguish among entities by certain characteristics. These characteristics include major and minor industry defined by two-digit and three-digit North American Industry Classification System (NAICS) code and size by both total assets and business receipts. PWBM creates cross-tabulations by merging the available size and industry data to create distinctions between firms by size, industry and size and industry. This disaggregation allows PWBM to use models that forecast business activity and tax liability for each of these sub-aggregate groups. 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 split the sub-aggregate data by 1120 filers excluding REITs, RICs and S corporations. The data is available from the IRS tax stats website.
Corporate income tax is estimated using the sub-aggregate data. Each sub-aggregate model simulates a single representative corporation’s behavior. Total corporate liability is calculated by combining the results from each sub-aggregate model. In this way, the PWBM-TM allows for heterogeneity across firms in forecasting income and deductions.
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 across the sub-aggregate groups. 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 for each sub-aggregate group.3
PWBM forecasts other deductions on the sub-aggregate business returns 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). The nature of the sub-aggregate models based on PWBM’s merging of available SOI data allows for a calculation of ETRs by size, industry or size and industry. Each sub-aggregate model projects income and expenses and therefore, liability (as noted here).
International Income Shifting
The U.S. international tax code, prior to the passage of the Tax Cuts and Jobs Act, was often described as a ‘worldwide’ system where U.S. individuals’ and corporations’ foreign-sourced income was taxed. This system was in contrast to the ‘territorial’ system all other major countries use where foreign-sourced income is not taxed. After the passage of the TCJA, the U.S. system can best be described as a modified territorial system. The system under TCJA attempts to induce U.S. multinational corporations to locate intellectual property in the U.S. rather than in other tax jurisdictions. In doing so, it also induces multinational corporations to locate tangible assets in foreign countries. As such, these new tax provisions change the incentives firms face in their location of asset decision. This decision is further complicated by the reduction of the corporate rate from 35% to 21%. PWBM’s tax module uses available SOI data on foreign tax credits to impute multinational firms’ foreign holdings. These holdings and their associated income are used to calculate both Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) tax liabilities. PWBM also uses available OECD data on corporate income to determine tax liability of foreign holdings. These calculations inform the optimal location decision for firms. They also allow PWBM to estimate the revenue effects of any policy decisions made by foreign countries in response to TCJA.
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. ↩