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Modernizing Corporate Taxation

BERKELEY – How to tax the income of multinational corporations (MNCs) was an unlikely headline topic at the recent G-8 summit in Ireland. It will be a key agenda item at the upcoming G-20 summit in Russia as well. Given these companies’ significance to national and global economic performance, world leaders’ focus on the arcane intricacies of corporate taxation is easy to understand – perhaps nowhere more so than in the United States.

As the US embarks on the difficult path of corporate tax reform, it should heed the United Kingdom’s example. Even as it champions multilateral cooperation to ensure that MNCs pay their “fair” share, the British government has slashed its corporate rate, exempted the active foreign income of British MNCs from the national corporate tax, and enacted a “patent box” that stipulates a 10% tax rate on qualified patent income.

As a result of years of cuts in corporate tax rates by other countries, the US now has the highest rate among the advanced economies. Reducing the top US federal rate, currently at 35%, to a more competitive level – the OECD average is around 25% – would encourage investment and job creation in the US by both domestic and foreign MNCs.

Paying for a rate cut by eliminating various corporate credits and deductions would simplify the code and trim the cost of compliance. It would also enhance efficiency by curbing tax-based distortions in companies’ investment decisions (what and where) and their choices concerning how to finance investments and which organizational forms to adopt. The Obama administration and Congressional leaders from both parties agree that a cut in the corporate tax rate should be revenue-neutral.