Working Paper: NBER ID: w1993
Authors: Mervyn A. King
Abstract: The current debate on tax reform has raised again the question of how the \ncorporate tax system should be altered. The cumulative effect of piece \nmeal changes to the tax system has been to produce major distortions in the \npattern of savings and investment and falling revenue in real terms. To \novercome these problems, reform, both in the US and UK, has focussed on \nways to tax the real economic income of companies. The main problems with \nthis approach are the difficulties of (a) indexing the tax treatment of \nincome from capital in a comprehensive manner and (b) defining economic \ndepreciation. This paper discusses and alternative way to obtain the \nobjective of fiscal neutrality without a significant erosion of the tax \nbase. The implications of such a cash flow corporate income tax for \nfinancial and investment decisions are discussed both theoretically and in \nterms of potential and administrative and practical problems of \nimplementation.
Keywords: corporate income tax; cash flow tax; fiscal neutrality; investment incentives
JEL Codes: H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow corporate income tax (G30) | eliminate distortions in savings and investment decisions (G11) |
| cash flow corporate income tax (G30) | increase incentive to invest (E22) |
| cash flow corporate income tax (G30) | neutral effect on cost of capital (G39) |
| cash flow corporate income tax (G30) | does not distort investment decisions (G19) |
| cash flow corporate income tax (G30) | sustain government income (H69) |