Many economists and policymakers believe that the U.S. corporate
tax system is in need of reform. There is, however, disagreement
over why the corporate tax system needs to be reformed, and what
specific policy measures should be included in a reform. To assist
policymakers in designing and evaluating corporate tax proposals,
this report (1) briefly reviews the current U.S. corporate tax
system; (2) discusses economic factors that may be considered in
the corporate tax reform debate; and (3) presents corporate tax
reform policy options, including a brief discussion of current
corporate tax reform proposals. The current U.S. corporate income
tax system generally taxes corporate income at a rate of 35%. This
tax is applied to income earned domestically and abroad, although
taxes on certain income earned abroad can be deferred indefinitely
if that income remains overseas. The U.S. corporate tax system also
contains a number of deductions, exemptions, deferrals, and tax
credits, often referred to as "tax expenditures." Collectively,
these provisions reduce the effective tax rate paid by many U.S.
corporations below the 35% statutory rate. In 2011, the sum of all
corporate tax expenditures was $158.8 billion. The significance of
the corporate tax as a federal revenue source has declined over
time. At its post-WWII peak in 1952, the corporate tax generated
32.1% of all federal tax revenue. In 2010, the corporate tax
accounted for 8.9% of federal tax revenue. The decline in corporate
revenues is a combination of decreasing effective tax rates, an
increasing fraction of business activity that is being carried out
by pass-through entities (particularly partnerships and S
corporations, which are not subject to the corporate tax), and a
decline in corporate sector profitability. A particular aspect of
the corporate tax system that receives substantial attention is the
35% statutory corporate tax rate. Although the U.S. has the world's
highest statutory corporate tax rate, the U.S. effective corporate
tax rate is similar to the Organization for Economic Co-operation
and Development (OECD) average. Further, the U.S. collects less in
corporate tax revenue relative to Gross Domestic Production (GDP)
(1.9% in 2009) than the average of other OECD countries (2.8% in
2009). This report discusses a number of economic considerations
that may be made while evaluating various corporate tax reform
proposals. These might include analyses of the likely effect on
households of certain reforms (also known as incidence analysis).
Policymakers might also want to consider how certain corporate tax
provisions contribute to the allocation of economic resources,
choosing policies that promote an efficient use of resources. Other
goals of corporate tax reform may include designing a system that
is simple to comply with and administer, while also promoting
competitiveness of U.S. corporations. Commonly discussed corporate
tax reforms include policies that would broaden the tax base (i.e.,
eliminate tax expenditures) to finance reduced corporate tax rates.
Concerns that the U.S. corporate tax system inefficiently imposes a
"double tax" on corporate income has led some to consider an
integration of the corporate and individual tax systems. The
treatment of pass-through income-business income not earned by C
corporations-has also received considerable attention in tax reform
debates. How the U.S. taxes income earned abroad, and the
possibility of moving to a territorial tax system, have emerged as
important issues. Both the Obama Administration and the House
Committee on Ways and Means Chairman David Camp have released tax
reform proposals that would change the current tax treatment of
U.S. multinationals.
General
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