Thursday, March 03, 2011

Corporate tax reform prototypes

Tomorrow, at a conference in Washington, D.C. on taxation and debt bias, I will be giving a brief (15-minute) talk in which I argue that the currently dominant U.S. corporate tax reform model, which is to lower the corporate rate and pay for this somehow (such as through corporate base-broadening) is probably inferior to two alternative models that have been widely discussed.

Here is a pdf version of my PowerPoint slides for the talk.

The basic theme of the talk is as follows. Let's take it as given that we are doing something that reduces corporate tax revenues in the interest of structural improvement, and that through some separate adjustment we are not only making up the revenues, but adequately addressing the impact on (a) shareholder-level taxation and (b) corporate versus non-corporate business taxation. That, after all, is the premise of the lowering-the-corporate-rate tax reform idea (although I might be cheating a bit in sweeping all this under the rug for purposes of the talk, if I had more than 15 minutes).

Within that general approach, I argue that adopting an allowance for corporate equity (ACE), with company-level deductions for corporate equity, at a suitable interest rate, to offset debt bias in the tax code, would be preferable to lowering the corporate rate. Adopting an allowance for corporate capital (ACC), under which the same imputed deduction would apply to both debt AND equity without regard to interest actually paid, would be better still.

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