Thursday, December 9, 2021
Alvin C. Warren Jr. (Harvard), Evaluating the Oxford Proposal for a Corporate Cash Flow Tax, 173 Tax Notes Fed. 1223 (Nov. 29, 2021):
In this article, Warren examines the argument of the Oxford International Tax Group that its proposal for a cash flow tax on domestic sales by domestic and foreign corporations is progressive because it is equivalent to a cash flow tax on domestic shareholders of domestic and foreign corporations, wherever their sales occur.
After almost a century, the international system for taxing cross-border business income has entered a period of instability and change. Following several years of study, the distinguished Oxford International Tax Group recently proposed a fundamental reform: The traditional corporate income tax would be replaced by taxation of a corporation’s domestic cash flows. The rationales for the proposal include both efficiency (only pure profits above the normal rate of return would be taxed) and administrability (shifting accounting profits abroad would not reduce taxes).
Another, perhaps surprising, argument for this proposal is that its incidence would fall primarily on a country’s residents who own shares in domestic and foreign companies. For example, equilibrating changes in floating exchange rates would transform a U.S. tax on U.S. sales by U.S. and foreign corporations into a tax on U.S. shareholders of U.S. and foreign corporations, wherever their sales occurred. The Oxford group indicates that the resulting tax burden is very likely to be progressive.
If, however, a progressive tax borne by individual owners of corporate stock is desirable, why not tax shareholders directly? The structure of such a tax would be similar to familiar U.S. provisions for retirement savings: Investments by individuals in domestic and foreign companies would be deductible, while disinvestments would be taxable. The Oxford group notes this possibility but does not examine such a tax to compare its strengths and weaknesses with those of its own proposal.
The purpose of this article is to illustrate the equivalence of the two taxes with a simple numerical example and to stimulate their comparison. If the two taxes are equivalent in effect, there might be reasons to favor one method of implementation over another. We begin with a brief review of the structure of the Oxford group’s proposal. In the interest of simplicity, we follow the authors’ decision to set aside questions of scope, such as the types of business organizations that would be subject to the tax. Accordingly, this discussion focuses on corporations and individual shareholders, but a broader implementation could include all businesses and their owners. We also put aside transition issues, such as the effects on different forms of existing capital, in order to focus on the equivalence argument.