The Role of the Corporate Tax

Abstract

Existing corporate taxes distort many aspects of firm behavior. To the extent that the corporate tax rate is lower than personal tax rates, taxes favor corporate activity, and favor retaining earnings rather than paying earnings out to employees and investors. Multinationals can even avoid these taxes by shifting income into tax havens. Given the ease with which multinationals can evade tax, the existing income tax structure faces major pressures, as reflected in average statutory corporate tax rates halving in recent decades. The Element speculates on alternative tax structures that will avoid these problems.

Is This Tax Reform, or Just Confusion?

“…In this case, with the enactment of expensing of most tangible capital expenditures (until the end of 2022) and the continued expensing of intangible investments, 7 the rate cut does not as substantially reduce the cost of capital; with expensing, the government is in effect a silent partner to private investment, bearing the same fraction of costs that it takes in revenue, and the extent of its partnership (that is, the tax rate) doesn't matter for the cost of capital. 8 One attempt to quantify the impact of the Tax Cuts and Jobs Act on the cost of capital concluded that the 2017 law would reduce the cost of capital for equity-financed corporate (and noncorporate) investment, increase it for debt-financed investment, and decrease it overall; the estimated decrease was negligible for intellectual property (DeBacker and Kasher 2018).…”

“…Under the Tax Cuts and Jobs Act, after 2021 companies will not be able to write off research and development expenses immediately, but rather will be able to deduct them over a five-year period. Whether this provision will survive expected intense lobbying to overturn it is unclear 8. With a tax rate of τ, expensing of all costs and full deductibility of losses, the present value of equityfinanced investments is Σ((1 -τ)R t -(1 -τ)C t )/(1 + r) t = (1 -τ)Σ(R t -C t )/(1 + r)t .…”