Corporate Tax Reform: Is broadening the base and lowering the rate always a good idea?

In a Bruegel post today, Jeremie Cohen-Setton and I weigh in on simulations of the Romney tax plan, new thinking on capital income taxation, and corporate tax reform.

Base-broadening corporate tax reform

Both candidates have roughly similar corporate tax plans that broaden the base and lower the rate (while protecting the R&D credit). Governor Romney proposes reducing the corporate rate to 25% and President Obama proposes a slightly smaller reduction to 28%.

While lower rates and broader bases are often praised by tax analysts, some including Larry Summers have been skeptical in the past. A primary concern is that leveling the playing field – that is lowering rates of corporate taxation by getting rid of deductions such as accelerated depreciation – can put more of the burden on new investments rather than existing capital, which can reduce the attractiveness of new investment.

But Alan Auerbach recently offered a proposal for a modern corporate tax that overcomes these concerns and still raises revenue from the corporate sector. Auerbach’s proposal has full expensing, which means that any cash flows coming into a business are taxed unless they go to fund investment. Hence, although Auerbach gets rid of deductions, it manages to make new investment attractive.

For more detail, see this report from PERAB starting on page 65.