Paul L. Caron

Tuesday, May 19, 2020

Clausing: Business Tax Principles For Economic Recovery In The Time Of Coronavirus

Kimberly Clausing (Reed College; moving to UCLA), Business Tax Principles for Economic Recovery in the Time of Coronavirus:

CoronavirusAs 2020 began, the U.S. business tax system was ill-suited to the nation’s economic challenges. After the excessive tax cuts of 2017, the U.S. corporate tax raised only one-third as much revenue, relative to gross domestic product (GDP), as those of U.S. trading partners in 2018 and 2019. The system of taxing pass-through businesses—businesses that do not pay the corporate tax—was already leaky, but it was further weakened by the inefficient pass-through deduction of the 2017 tax law. These business tax cuts lavished rewards on those at the top of the income distribution without demonstrably boosting either business investment or wages. As a result, the U.S. tax system is less progressive than what came before, despite prior decades of uncontested increases in income inequality. The new tax law is also ill-suited to a global economy, explicitly favoring offshore earnings, rather than those in the United States.

Now, the COVID-19 crisis has raised unprecedented threats to public health and the economy. Both the Federal Reserve System and Congress have leapt into action. Congress passed multiple relief packages, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March, which provided about $2 trillion in funding for response and relief.

While many of the provisions of the CARES Act provide critical relief at this urgent time, the business tax cuts in the bill should have been more carefully targeted. It is also essential that Congress counter the expectation that crisis measures will be extended post-crisis and instead pursue revenue-raising business tax reform once the crisis is past. This column outlines three principles for an efficient and equitable business tax system that is fit for purpose.

Principle 1: Business assistance should help companies facing temporary liquidity issues due to the coronavirus crisis ...

Principle 2: Business tax cuts should be carefully targeted and explicitly temporary ...

Principle 3: After the crisis, the corporate tax needs to be stronger ...

COVID-19 has generated a laudable sense of shared sacrifice in a time of national devastation and disruption. Before, during, and after the crisis, the fiscal needs of the country far outstrip revenue streams, and these shortfalls are occurring amid a context of widening income inequality. While it is reasonable for taxpayers to assist businesses in times of trouble, more should be expected from highly profitable companies—both now and in the future. As the nation moves forward from this crisis, strengthening business taxation should be at the top of the agenda.

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