To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.

December 20, 2007
hp-749

Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century

A Summary

Approach 1:  Replacing the Business Income Tax System with a Business Activity Tax (BAT)

• The BAT tax base would be gross receipts from sales of goods and services minus purchases of goods and services (including purchases of capital items) from other businesses.
• Wages and other forms of employee compensation (such as fringe benefits) would not be deductible.
• Interest would be removed from the tax base -- it would neither be included in income nor deductible.
• Individual level taxes on dividends and capital gains would be retained.  Interest income received by individuals would be taxed at the current 15 percent dividends and capital gains rates.
• This approach is estimated to improve economic performance, ultimately increasing the size of the economy by roughly 2.0 percent to 2.5 percent.
• This kind of reform would have various implementation and administrative issues. 

Approach 2:  Broadening the Business Tax Base and Lowering the Statutory Tax Rate/Providing Expensing

• Broadening the business tax base by eliminating all special provisions would allow:
  –   The top federal business tax rate to be lowered to 28 percent.
         –  If accelerated depreciation is retained, the rate would drop only to 31 percent
  –  Alternatively, acquisitions of new investment could be partially expensed (35% could be written off immediately).
  –  Treasury analyses show that the revenue-neutral rate reduction provides little economic impact, and expensing would provide benefits only to certain industries.
  
• More significant benefits to the economy and U.S. competitiveness might be achieved through a substantially lower business tax rate (e.g., 20 percent) or greater expensing (e.g., 65 percent).
  –   Such a reduction would require non-revenue neutral reform of the business tax system.
  
• The present U.S. international tax system may result in a competitive disadvantage for U.S. companies competing with foreign-based companies.
  
• The present international tax system distorts economic behavior by:
  –        Discouraging repatriation of foreign earnings; and
  –        Encouraging significant tax planning.

Approach 3:  Specific Areas of our Current Business Tax System That Could be Addressed

• Multiple taxation of corporate profits
  –        Corporate capital gains and dividends received deduction
• Tax bias favoring debt finance
• Taxation of international income
• Treatment of losses
• Book-tax conformity
• Other areas to improve tax administration

NOTE: The approaches presented in this study are not intended to be all inclusive and do not favor one approach over another.

REPORTS

• Study: Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century