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US Treasury Publishes Study On Improving Business Tax Competitiveness

by Mike Godfrey,, Washington

24 December 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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