April 22, 2014
Internationalize Corporate Income Tax or Remove It
Eric Toder of the Tax Policy Center and Alan Viard of the American Enterprise Institute wrote a recent article questioning whether the corporate tax reforms being debated in Congress will address the widespread problems with levy. Toder and Viard suggests that President Obama’s aim of merely lowering rates and tinkering with tax rules for U.S. -based multi-national corporations falls short. Instead, the men argue that the corporate system needs “major surgery.”
Two of the corporate tax’s biggest flaws are: its response or lack of response to both the explosion of international commerce and the growing share of corporate income produced with intellectual property.
In a Peter G. Peterson Foundation funded paper, they propose two alternatives: build a tax based on a broad international agreement on the allocation of corporate income among countries, or remove the corporate income tax entirely and replace it with a direct tax on shareholders. This would lead to capital gains being taxed as they accrue rather than when they are realized upon the sales of shares.
World-wide taxation would prevent U.S. multinationals from shifting reported income to low-tax countries, however, U.S. corporations might be at a disadvantage if other countries fail to impose similar regulations on their multinationals. That brings up the option of a purely territorial tax, which would only continue to increase the likelihood of multinationals shifting investments and reported income overseas.
Viard and Toder would encourage the United States to seek an agreement with other countries on a uniform rule for allocating corporate income among jurisdictions. Alternatively, the U.S. could forgo its corporate income tax entirely for publicly-traded companies and tax shareholders directly at an ordinary income tax rate on dividends and accrued gains, with a deduction for accrued losses. The tax would be based on the location of the actual shareholder, rather than where the corporation earned its income, similar to partnerships and S corporations.
Source: Gleckman, Howard, “Two Ways to Fix the Corporate Income Tax: Internationalize it or Kill It,” Forbes, April 4th, 2014