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US Treasury Publishes Study On Improving Business Tax Competitiveness,
by Mike Godfrey, Tax-News.com, Washington
Monday, December 24, 2007
The US Treasury Department last week released a study on business taxation
and global competitiveness.
The study outlines broad approaches to reform meant to inform the public policy
debate on the issue, and is a follow up to the July conference on business
taxes that was hosted by Treasury Secretary, Henry Paulson.
The study covers three proposed approaches which would improve the competitiveness
of the US Business Tax System in the 21st Century.
These are:
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%
dividends and capital gains rates.
This approach is estimated to improve economic performance, ultimately increasing
the size of the economy by roughly 2.0% to 2.5%.
This kind of reform would have various implementation and administrative
issues.
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%.
If accelerated depreciation is retained, the rate would drop only
to 31%
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%) or
greater expensing (e.g., 65%).
Such a reduction would require non-revenue neutral reform of the business
tax system. The present US international tax system may result in a competitive
disadvantage for US 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.
Specific Areas of the 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.
Assistant. Secretary for Tax Policy, Eric Solomon commented, on the publication
of the study, that:
"This report, Approaches to Improve the Competitiveness of the US
Business Tax System for the 21st Century, outlines several broad approaches
to business tax reform. The study also outlines specific business tax areas
that can be addressed. There are no policy recommendations in this study. We
believe it will provide significant substance for discussion, and will further
the effort to inform the public policy debate."
"The world economy has changed dramatically over the past half century
and so too has the US role in that economy. Trade and investment flow with greater
volume and greater ease. As we look to the future, many factors, including education,
immigration, and trade policies play an important role in the lives and living
standards of US workers and in the ability of US companies to compete globally."
"By influencing incentives to acquire and use capital, business taxes
also play an important role in economic decision making. Our major trading partners
recognize this. Many have or plan to modify their business tax systems to improve
their global competitiveness. The current US system is far from optimal, and
we cannot afford to be left behind."
He concluded:
"To maintain the competitiveness of US businesses and US workers in a
global economy, an examination of our business tax system in the context of
the global marketplace is overdue. As we continue our work on this important
issue, we look forward to discussions with Congress, the business community,
and other policy makers."
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