The Treasury Department’s Office of Tax Policy today released a new 121-page study, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century.  Here is the summary (HP-749):

Approach 1: 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.

Approach 2: 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 U.S. international tax system may result in a competitive disadvantage for U.S. 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.

Approach 3: Specific Areas of our 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

NOTE: The approaches presented in this study are not intended to be all inclusive and do not favor one approach over another.

See also:

• Statement of Assistant Secretary for Tax Policy Eric Solomon (HP-751)
• Forbes:  Treasury Presents Business Tax Reform Options
• Reuters:  Treasury Floats Business Tax Rate Cut, VAT Ideas