NCPA - National Center for Policy Analysis

Corporate Income Tax: Reform Now

May 15, 2015

There is a growing consensus that the current system of taxing business income needs reform and bi-partisan agreement on some of the main directions of reform.

  • The United States has the highest corporate tax rate in the Organization of Economic Cooperation and Development (OECD). This discourages investment in the United States by both U.S. and foreign-based multinational corporations and encourages corporations to report income in other jurisdictions.
  • The U.S. rules for taxing multinational corporations encourage American firms to earn and retain profits overseas and place some companies at a competitive disadvantage, encouraging them to engage in transactions that shift their corporate residence overseas.
  • In spite of its high corporate tax rate, the U.S. tax system generates less corporate revenue as a share of Gross Domestic Product than the OECD average, partly due to more generous business tax preferences in the United States than elsewhere, but also due to the relatively high share of U.S. business income that is not subject to the corporate income tax.

It is important to distinguish changes that affect only taxable corporations from those that affect all businesses, as it is impossible to reform the corporate income tax without also affecting owners of pass-through businesses whose business income is taxable under the individual income tax. Some, but not all of these affected taxpayers, are owners of small businesses.

The main way that tax reform could adversely affect owners of pass-through businesses is by reducing the benefits they receive from the generous capital cost recovery provisions in the federal income tax.

Source: Eric J. Toder, "Tax Reform and Small Business," Tax Policy Center Urban Institute & Brookings Institution, April 15, 2015.

 

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