Defining Meaningful Tax Reform

Reducing the Corporate Tax Could Create a More Rational Tax Code: NCPA

Source: NCPA

Dallas, TX (December 9th, 2015) – As tax reform continues to play a major role in the 2016 presidential debates, National Center for Policy Analysis Senior Fellow and Director of the Beacon Hill Institute David Tuerck and Beacon Hill’s James Angelini have published a new report outlining the impact of different tax reform plans.

Corporate taxes present a problem in that they tax income twice - first at the corporate level, and again at the individual level, explains Tuerck. There are two opposing standards of tax equity - one based on the accretion standard for measuring income, the other based on the consumption standard. 

Depending upon which standard is used, the government has a choice of three categories of reform to reduce the corporate tax with the intention of creating a more rational tax code:

  • Proposals that would retain, but reform, the corporate tax (the President’s FY 2016 Budget proposal, the Tax Reform Act of 2014, proposals that limit corporate inversions, and proposals for tax integration);
  • Proposals that would automatically eliminate the corporate tax (the Fair Tax and the VAT); and
  • Proposals under which corporations would still file a tax return but there would be no distinction, for tax purposes, between incorporated and unincorporated enterprises (the flat tax). 

The first path would necessitate eliminating the double taxation of corporate income and to tax all income of U.S. residents equally. According to the report, this would also eliminate the problem with inversions, by taxing only individual income and not business income.

Under the accretion standard, Americans would be taxed on dividends received from corporations located in the United States and from their foreign subsidiaries, but the parent companies would not be taxed on their profits. Hence, reform based on the accretion concept, like reform based on the consumption concept, eliminates corporate taxation.