A Modern Corporate Tax

Here’s a proposal for a modern corporate tax from Alan Auerbach:

This paper proposes two reforms to the U.S. corporate tax system: first, an immediate deduction for all investments that would replace the current system of depreciation allowances, and second, replacing the current approach to taxing foreign-source income with a system that ignores all transactions except those occurring exclusively in the United States. These changes would eliminate existing incentives to borrow and shift profits abroad while maintaining the corporate tax as a progressive revenue source.

He concludes:

The set of reforms proposed in this paper would produce a streamlined corporate tax by replacing the current system with a much simpler one. It would eliminate the normal returns to capital from the corporate tax base, thereby encouraging investment. It would neutralize existing tax incentives for corporate borrowing, removing a potential source of future economic instability. By limiting the tax base to domestic cash flows, it would eliminate incentives to shift profits abroad without requiring U.S. participation in a race to the bottom to cut the corporate tax rate. At the same time, it would jettison one of the most complicated sets of tax policy provisions, those relating to international taxation. Although the plan would maintain the corporate tax as a source of revenue, it would make the burden of this tax more progressive and likely increase domestic activity, income, and employment. It is a corporate tax system that is much more appropriate for our current economic environment than the one we have inherited from a century ago.

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About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
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