BERKELEY – Corporate tax reform has emerged as an area of potential bipartisan action in the United States Congress over the next few months. But fundamental questions about the right approach remain.
There is widespread agreement that the US corporate tax system is deeply flawed. The rate is too high; the base is too narrow; it is costly to administer; and it is riddled with credits, deductions, and special preferences that distort decisions, harming the economy.
Despite the high rate, corporate tax revenues comprise a relatively small share of government revenue, partly because a rising share of total business receipts – currently more than 30% – flows through so-called “pass-through" business organizations, which are not subject to corporate tax. Indeed, most corporate tax revenues are paid by a small number of large multinational companies that earn more than half of their income from their foreign operations.
These companies compete in global markets with firms headquartered in countries that use business-friendly tax policies to attract the investments, income, and associated externalities of multinational companies. The problem for the US is that developed and emerging economies have been slashing their rates, leaving the US – which had one of the developed world's lowest corporate tax rates after the 1986 tax reform – at a serious disadvantage.