A Modern Corporate Tax

Alan J. Auerbach

University of California, Berkeley

January 18, 2013

Aims of Corporate Tax Reform

1. Increase US company global competitiveness

2. Encourage location of operations in US

3. Maintain tax revenues

4. Limit cross-border shifting of profits abroad

5. Reduce distortions among industries and between debt and equity finance

Standard approaches fail at one or more of these2

Standard Approach #1

Reduce the US corporate tax rate+ Increases US company competitiveness+ Increases incentive for US production+ Reduces incentive to shift profits abroad+ Reduces debt-equity and inter-industry distortions

But– Reduces tax revenue

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Standard Approach #2

Move toward a territorial tax system+ Increases US company competitiveness

But– Increases incentive to locate activities abroad– Increases incentive to shift profits abroad– Likely to reduce tax revenue

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Standard Approach #3

Move toward a worldwide tax system+ Reduces incentive to shift profits abroad+ Reduces incentive to locate activities abroad+ Raises tax revenue

But– Reduces US company competitiveness

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A Modern Corporate Tax

1. Replace current system of depreciation allowances with one that provides immediate expensing for investment net of borrowing

2. Ignore all transactions that are not solely domestic in nature– Ignore export revenues and import expenses– Ignore foreign borrowing, lending and interest

A destination-based corporate cash-flow tax

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A Modern Corporate Tax

+ Increases US company competitiveness+ Increases incentive to produce in US+ Replaces incentive to shift profits from US

with an incentive to shift profits to US+ A level playing field between debt and equity

and among different investments

? At current tax rate revenue impact unclear; but tax rate no longer as relevant for other factors

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A Modern Corporate Tax

Exchange rates should adjust, as under VAT

Ideally, the plan would cover large non-corporate entities with cross-border activities

A much simpler tax system– Taxes only domestic activities– No need to keep track of basis for domestic assets

http://www.americanprogress.org/wp-content/uploads/issues/2010/12/pdf/auerbachpaper.pdf

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