An analysis of the effect of the Federal Income Tax Law upon the United States balance of payments

This study summarizes the results of an examination made of the portion of the Internal Revenue Code dealing with income taxes in order to find those provisions which have an effect upon the United States balance of payments. In order to facilitate this search, the potential balance of payments effects were divided into two kindst those which affect the balance of payments "directly" and those which affect the balance of payments "Indirectly." The indirect effects were considered to be those changes in the balance of payments which result not from an immediate encouragement to engage in international transactions, but which are a secondary response to changes in income, prices, and interest rates first brought about in the domestic economy by the hypothetical addition or deletion of the tax provision in question. Direct effects were considered to be all other changes in imports, exports, capital flows or other balance of payments accounts which would be brought about by the response of United States residents and foreigners to the change In the Internal Revenue Code being considered. Indirect effects were evaluated with the aid of a two part macroeconomic model developed In Chapter II. The first part, that used to predict effects upon variables within the domestic economy, was essentially that of the Hicks-Hansen presentation, with the second part of the model being designed to predict the response of United States residents and foreigners to changes In prices. Income, and Interest rates previously determined. The criterion used to select the provisions contained In the Code with direct balance of payments Implications was wording which would tend to encourage Americans or foreigners to engage In transactions affecting either exports. Imports, remittances and pensions. United States net private capital flows, and foreign long term net capital flows without tending to affect other such accounts in an equal but opposite direction (liquidity basis). The bulk of the study (Chapters III-IX)consists of a detailed listing and explanation of these effects after an examination of Subchapters A-T of Chapter 1, Subtitle A of the Internal Revenue Code made with the aid of the model previously developed. From the study it was determined that the provisions most significant for the measurement of taxable income- those sections with significant indirect implications fqr the balance of payments-fall within the meaning of Section 61 of Part I of Subchapter B (definition of gross Income), Sections 141, 151-154. 162, 165, 212, 167-169, and 177-179 (tax deductions) and "itemized" deductions. Also found to be Important for aggregate demand, and therefore indirectly for the balance of payments, were Parts I, II, and V of Subchapter A (general tax rates). Part IV of Subchapter A (tax credits), and those sections discussed within the study having a material effect on income exclusions and Investment Incentives. From these findings It was concluded that while In planning for and making computations of tax liabilities Individual taxpayers must be concerned with a wide variety of complex rules contained in the Code, most of the sections considered In the study could be deleted without significantly affecting either domestic Income, interest rates, prices, or indirectly the United States balance of payments. As a corollary to this conclusion, it was additionally inferred that if the balance of payments were to become the overriding consideration of fiscal policy, policymakers could first look to the provisions mentioned above for those Income tax provisions which could be changed strategically to accomplish their goals. A similar conclusion was drawn as to the direct effects In that less than one fifth of the sections examined during the study were found to have significant balance of payments ramifications, with these being concentrated for the most part In Subchapters B and N of the Code, After presenting a list of suggested changes which could be Incorporated Into the Income tax law to achieve desired effects upon the United States balance of payments as well as some criteria which could be used In evaluating their desirability. It was concluded that for the most part the Internal Revenue Code has apparently been overlooked by Congress as a vehicle for achieving balance of payments policy.