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Tuesday, September 10, 2013

Hasen: Comprehensive Business Income Tax 2.0

Tax Analysys Logo (2013)David Hasen (Santa Clara), CBIT 2.0: A Proposal to Address US Business Taxation, 140 Tax Notes 909 (Aug. 26, 2013):

In 1992, the Treasury Department proposed a comprehensive business income tax, or CBIT, as a reform option for the taxation of business income. In Treasury's proposal, all taxes on business income (including income of sole proprietorships) would be replaced by a flat, entity-level tax. Interest would be non-deductible and non-includible when paid by CBIT-covered entities. Taxes on dividends would be eliminated. Treasury proposed that a CBIT rate of 31 percent would be revenue-neutral as compared with the law then in effect. The virtues of the CBIT as proposed included removal of the tax biases in choice of entity and in method of business finance, as well as substantial simplification of the tax law.

This paper argues that a modified version of the CBIT, designed to address significant developments since 1992, merits serious consideration as a reform option. The principal change to Treasury's proposal is the addition of a tax on distributions to high earners, coupled with a deduction against that tax for distributions that are timely reinvested. These changes would retain most of the virtues of the original CBIT while enabling Congress to adopt competitive rates and meet existing revenue commitments. The paper focuses on incentive effects and revenue effects. It also discusses how the CBIT would mesh with taxation of cross-border arrangements and compares the CBIT to a national value-added tax.

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