(Archived Content)
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.
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