April 27, 2017


Getting to a 15 Percent Corporate Tax Rate Will Require Hard Choices (Alan D. Viard, April 26, 2017, The Hill)

The distortions caused by the corporate income tax in today's globalized economy are legion.  [...]

A more sweeping approach would seek bigger economic gains by moving toward consumption taxation. Consumption taxes are more growth-friendly than income taxes because they do not penalize saving and investment.

Most consumption tax plans involve some form of value-added tax (VAT) -- a consumption tax used in 160 countries that involves taxing the value added at each stage of production. The tax blueprint that House Republicans presented last year would replace the conventional corporate income tax with a business cash flow tax, a modified VAT that allows firms to deduct their wage costs.

The Republican blueprint has encountered roadblocks because the cash-flow tax is not well understood and because it would not fit well with the rest of the federal tax system nor with international trade rules.

A more straightforward approach would adopt a full-fledged VAT. By itself, using a VAT to pay for corporate rate reduction would shift the tax burden toward middle-income and lower-income households. To address that problem, the change should be part of a bigger reform that includes individual income tax cuts and rebates or tax credits for low-income households. Several proposals along these lines have been put forward.

Of course, moving to a VAT would raise many design and transition issues. For example, the VAT should be prominently listed on customer receipts to keep it from becoming a stealth tax that politicians could repeatedly raise without public scrutiny.

Cutting the corporate tax rate to 15 percent in a fiscally responsible manner would provide a powerful boost to the American economy.

Posted by at April 27, 2017 11:48 AM