Harvard Business Review, Breaking Down the New U.S. Corporate Tax Law:
Mihir Desai, a professor of finance at Harvard Business School, breaks down the brand-new U.S. tax law. He says it will affect everything from how corporate assets are financed to how business are structured. He predicts many individuals will lower their tax burdens by setting themselves up as corporations. And he discusses how the law shifts U.S. tax policy toward a territorial system of corporate taxes, one that will affect multinationals and national competitiveness. Finally, Desai explains what he would have done differently with the $1.5 trillion the tax cut is projected to cost. ...
An expert on business taxation, he’s the author of the 2012 HBR article A Better Way to Tax U.S. Businesses. ...
SARAH GREEN CARMICHAEL: Do you have an opinion on, say, like the three biggest changes to the corporate tax code?
MIHIR DESAI: Yeah, sure. So, I think the first place that one has to start is on just the rate, which is, it’s a really significant cut to the rate, from 35 percent to 21 percent. And that I think is just the first piece of the puzzle, and it is an enormously expensive thing to do—probably around more than $1.3 trillion. And in many ways, that is one of the parts of the bill to like, meaning our statutory rate had been out of whack with the rest of the world, and that led to a lot of transfer pricing abuses, bad investment incentives, and so getting it down to 20-plus percent I think is a good idea, at least partly a good idea.
The second big thing to think about at the corporate level is to understand the international domain has just changed completely in a really significant way. The entire system of worldwide taxation is giving way to a system of territorial taxation. There’s going to be a one-time repatriation tax, and then there are going to be a bunch of new taxes on multinational firms as they kind of adjust to this new regime. So, the second big thing has got to be the international side.
And the third big thing is going to sound a little bit perhaps in the weeds, but I think it’s really important, is we’re moving from a system where corporations can depreciate their assets that they buy so they can expense them. They just literally deduct them all upfront. So, that’s a really important investment incentive; and as a consequence of that, that’s going to change a lot of things because we won’t have the complex rules we used to have.