New York Times: One Way to Fix the Corporate Tax: Repeal It, by N. Gregory Mankiw (Harvard):
If tax inversions are a problem, as arguably they are, the blame lies not with business leaders who are doing their best to do their jobs, but rather with the lawmakers who have failed to do the same. The writers of the tax code have given us a system that is deeply flawed in many ways, especially as it applies to businesses.
The most obvious problem is that the corporate tax rate in the United States is about twice the average rate in Europe. National tax systems differ along many dimensions, making international comparisons difficult and controversial. Yet simply cutting the rate to be more in line with norms abroad would do a lot to stop inversions.
A more subtle problem is that the United States has a form of corporate tax that differs from that of most nations and doesn’t make much sense in the modern global economy.
A main feature of the modern multinational corporation is that it is, truly, multinational. It has employees, customers and shareholders around the world. Its place of legal domicile is almost irrelevant. A good tax system would focus more on the economic fundamentals and less on the legal determination of a company’s headquarters.
Most nations recognize this principle by adopting a territorial corporate tax. They tax economic activity that occurs within their borders and exclude from taxation income earned abroad. (That foreign-source income, however, is usually taxed by the nation where it is earned.) Six of the Group of 7 nations have territorial tax systems. Continue reading the main story Continue reading the main story.
The exception is the United States, which has a worldwide corporate tax. For companies incorporated in the United States, the tax is based on all income, regardless of where it is earned. Again, moving our tax code toward international norms would help slow corporate inversions.
Perhaps the boldest and best response to corporate inversions is to completely rethink the basis of corporate taxation. ... Major tax reform may be too much to hope for, given the current dysfunction in Washington. Nonetheless, it’s worth keeping the possibilities in mind. Corporate tax inversions aren’t the largest problem facing the nation, but they are a reminder that a better tax system is within reach, and that only politics stands in the way.
New York Times: Cutting the Corporate Tax Would Grow Other Problems, by Jared Bernstein (Center on Budget and Policy Priorities):
The current debate over corporate inversions, in which American companies like Burger King consider renouncing their citizenship for tax-reduction purposes, is only the latest reminder that the United States corporate tax code has deep problems.
Ideas for reforming the business side of the tax code abound, but there are those on both the left and the right who argue that it cannot be salvaged and should simply be abolished. N. Gregory Mankiw made the argument from the right on Sunday in The Times.
The basic idea behind abolition is that the current corporate tax code is fraught with wasteful loopholes — each of which has politically power defenders — that both lose revenue and distort business decisions. The abolitionists ask: Why not give up on the fiction that we can adequately and efficiently tax companies and instead tax their shareholders at higher income-tax rates?
But as imperfect as the corporate tax may be, the end of it would create all kinds of problems and disadvantages. Here is a breakdown of those drawbacks: ...
Believe me, as someone who’s been debating this issue for decades, I recognize how tempting it is to just chuck the whole corporate code. But to do so now would only further encourage tax avoidance and erode an already diminished tax base.
August 26, 2014 in Tax | Permalink
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