Mankiw, N. Gregory, “One Way to Fix the Corporate Tax: Repeal It,” The New York Times, 08/23/14

“Perhaps the boldest and best response to corporate inversions is to completely rethink the basis of corporate taxation. The first step is to acknowledge that corporations are more like tax collectors than taxpayers. The burden of the corporate tax is ultimately borne by people — some combination of the companies’ employees, customers and shareholders. After recognizing that corporations are mere conduits, we can focus more directly on the people.

A long tradition in political philosophy and economics, dating back about four centuries to Thomas Hobbes, suggests that the amount that a person consumes is the right basis for taxation. A broad-based consumption tax asks a person to contribute to support the government according to how much of the economy’s output of goods and services he or she enjoys. It doesn’t matter whether the resources for that consumption come from wages, interest, rent, dividends, capital gains or inheritance.

So here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.”

http://www.nytimes.com/2014/08/24/upshot/one-way-to-fix-the-corporate-tax-repeal-it.html?emc=eta1&_r=0&abt=0002&abg=1

Tax Reform: End the Corporate Income Tax to Grow Economy & Wages

The Corporate Income Tax, today, collects just 1.8% of GDP, and accounts for only 8% of total federal revenues.  By comparison, at its peak in 1952 the CIT amounted to one-third of federal revenues.  Corporations have employed every legal resource to reduce their tax liability, and while some multi-national corporations park profits in lower-taxed countries, others with less ethical boundaries claim overseas subsidiaries in tax havens and transfer their profits to a mailbox.

With the CIT having been perversely minimized, the VATinfo website has endorsed the concept of sweeping tax reform, at once eliminating the Corporate Income Tax and replacing it with a Value Added Tax, and combining it with a progressive Personal Income Tax employing a large standard deduction and no other deductions.  VATinfo’s rough “Smart Tax” calculation…based upon IRS tables with insight provided by IRS and the Tax Policy Center at Brookings Institute…projected that a VAT tax rate of 9% would be required to replace the CIT and offset a Personal Income Taxes cut for incomes under $100,000.  (The plan envisioned eliminating the PIT for filers with Adjusted Gross Income under $50,000…two-thirds of all filers; reducing the PIT by 56% for those with AGI between $50,000 and $75,000; reducing the PIT by 17% for those with AGI between $75,000 and $100,000.)

In December 2013, the National Bureau of Economic Research released a working paper, “Simulating the Elimination of the U.S. Corporate Income Tax,” with very reinforcing conclusions.  Foremost is the understanding that when U.S. capital moves to a lower-taxed country, U.S. workers suffer a loss in labor demand and real wages.  And, the reverse would be true were the U.S. to end the CIT.  The study projects that capital would flow to the U.S. resulting in “a rapid and sustained 23 to 37 percent higher capital stock.”  “Higher capital per worker means higher labor productivity and, thus, higher real wages.  Indeed, in the wage-tax simulation, real wages of unskilled workers end up 12 percent higher and those of skilled workers end up 13 percent higher.”

The NBER study concludes that while the economic gains from eliminating the CIT would fall short of replacing the revenue loss entirely (requiring an increase in taxes on wages, or a consumption tax), there would be relative distributional gains accruing to both skilled and unskilled workers, i.e., addressing income inequality.

Sullivan, Martin A., “U.S. Tax Exceptionalism,” TaxAnalysts.com, 09/16/13

“The United States is the only nation of any significant size without a VAT. The United States also has the world’s highest corporate tax rate. Those two facts are not unrelated. Despite ever-tightening budgets, governments around the world over the last two decades have steadily reduced their corporate tax rates. How were they able to do this? They made up lost corporate tax revenues by relying more heavily on their VATs…

…For economists this is a no-brainer. The corporate tax–with its arbitrary and excessive burden on the profits of certain businesses–is our most damaging tax. A broad-based consumption tax, like a VAT — which unlike the income tax is not inherently biased against saving and investment — causes the least harm to the economy. Replacing corporate tax revenues with consumption tax revenues is the most straightforward way to improve America’s tax competitiveness. Everything else is just nibbling around the edges.

Of course, that move would make a tax system less progressive. To address this, economists suggest providing rebates to low-income households to make up for their disproportionate burden. Another idea that does not get enough discussion is to simply accept that a more competitive tax system will become more regressive and to use additional VAT funds to expand social programs to help America’s struggling poor and middle class.

It is not the political left, however, that is the main obstacle to the U.S. adopting a VAT. Conservatives are dead set against the idea even though they hate the income tax and at every opportunity seek to reduce taxes on saving. That is because they fear the VAT is a money machine that, once in place, will make it too easy for government to expand to European levels. In contrast, conservatives and business groups outside the United States loudly endorse the expansion of VATs as good replacements for corporate taxes. Whether or not those fears are well founded, we must recognize that as long as we adopt the approach of relying primarily on income and corporate taxes to fund our government–whatever size it is–we are stifling U.S. competitiveness while the rest of the world moves ahead.”

http://www.taxanalysts.com/taxcom/taxblog.nsf/Permalink/MSUN-9BLEG5?OpenDocument

Hollings, Sen. Fritz, “It’s the Economy, Stupid,” HuffingtonPost.com, 01/27/12

“We need to get in step with 141 countries that use a VAT to compete in globalization. The VAT is rebated on exports, creating jobs and removes the subsidy of foreign imports. Substituting the 35% corporate tax with a 6% VAT is a tax cut and releases $1.2 trillion in off-shore profits that Corporate America can repatriate tax free and create millions of jobs. The VAT is on consumption rather than income – the more you spend the more you pay. Now the rich pays its fair share. In 2010, the corporate income tax produced $194.1 billion in revenues. A 6% VAT in 2010 would have produced $700 billion in revenues. Since the poor spend most of their income on food, health, and housing, exemptions for the poor still leave billions to pay down the debt. The VAT is self-enforcing — you either pay it or pass it on. Much of the IRS can be eliminated, cutting the size of government. The VAT has no loopholes, giving instant tax reform. It puts the tax lobbyists out of business. They will howl: “We can’t have a national sales tax.” Substituting the corporate tax with a VAT is not a sales tax. Corporate America merely factors in the 6% as a cost of production rather than 35%. The lobbyists will call for tax reform — the lobbyists’ playground. We always end up closing two loopholes and adding four more. It took us six years to find the Ethanol loophole. When I left the Senate in 2005, tax expenditures or loopholes were costing the budget $1.3 trillion every year.”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/its-the-economy-stupid_2_b_1237247.html

Auerbach, Alan J., “A Modern Corporate Tax,” University of California, Berkeley, 12/01/10

“The U.S. corporate tax system debuted more than 100 years ago and has evolved little to meet the challenges of today’s economy. The country would benefit greatly from a reform of this system that maintains corporate tax revenues while increasing incentives for businesses to locate, invest, and produce in the United States, thus offering the prospect of higher wages and better job opportunities for American workers.

At its peak in the 1960s, the U.S. corporate income tax accounted for more than one-fifth of all federal revenues, making it the second most important federal revenue source after the personal income tax. Figure 1 shows that since then corporate tax revenues have declined as a share of national income and total federal revenues. After the major Reagan-era tax cuts in 1981, the corporate tax has provided less than 12 percent of federal revenues in all but four fiscal years, during the period 2005–2008, when a booming financial sector generated temporarily high profits and tax revenues. Few analysts expect a rebound back to those levels….

…Instead of using either corporate residence or the source of production to determine the tax base, I propose to use the destination principle, collecting tax on the basis of where a corporation’s products are used.

The destination principle is already familiar in the context of taxation, because it is the approach used around the world in the implementation of value-added taxes (VATs). Under the VAT, the destination principle is applied through border adjustments, which impose the VAT on all imports and rebate the tax previously collected on domestic production that is exported. Imposing border adjustments serves to make the VAT a tax on all domestic consumption, but another important feature is that it eliminates the incentive that domestic producers would otherwise have to engage in profit shifting for tax purposes.”

http://www.brookings.edu/papers/2010/12_corporate_tax_auerbach.aspx?rssid=economics