Quick thoughts on corporate tax reform

Posted in Politics and Policy at 9:09 am

Some quick thoughts, with the Apple testimony being all over the press right now (I’ll try to post more details later):

    – Keep the worldwide system
    - Keep the foreign tax credit
    - Do away with the deferral on foreign income
    - Lower the tax rate to a range that’s consistent with that of our major trading partners (e.g., 25-28%)
    - Crack down hard on the use of transfer pricing, IP royalties, and thin capitalization used to shift profits to tax havens

What NOT to do:

    - Move to a territorial system. This would dramatically increase the incentive to shift profits to low tax jurisdictions.
    - Eliminate the corporate income tax entirely. Unfortunately, the “give up” strategy seems to be gaining traction out there, even amongst people who should know better. You can’t eliminate the corporate income tax and instead tax individuals on the distributed income for very practical reasons. People would simply incorporate, shift their assets to the corporation, recast all of their wage/salary/investment income as corporate profit, and defer paying taxes on it essentially forever. In the meantime, they would live by borrowing money from their corporation (the principal would be untaxed and any “interest” they paid back to the company would itself be tax deductible). No matter how many laws you passed banning this sort of structure, people would find ways around it as the incentives are enormous.