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posted on 10 June 2017

Corporate Tax Reform: Potential Gains At A Price To Some

from the Dallas Fed

Corporate tax reform has become a highprofile issue amid fears that firms are increasingly taking their headquarters and production facilities offshore and booking profits abroad. Adjustments to the tax system can help address these factors, though not without potentially introducing new issues.

Corporate tax reform has recently attracted greater public attention. Existing U.S. tax rates are said to encourage tax avoidance and motivate firms to move overseas, reducing revenue and eliminating opportunities for U.S. workers.

Moreover, some view the tax code as discouraging saving and investment while incentivizing firms to use debt rather than equity financing, distorting resource allocation and slowing economic growth. The corporate tax system is even said to put the U.S. at a competitive disadvantage visà- vis the country’s major trading partners.

That the U.S. corporate rate is high is undeniable. The U.S. rate of 39.1 percent is easily the highest among developed world competitors and almost double the rate that prevails in the U.K. (Chart 1). Such a rate provides an incentive for firms to locate elsewhere.

It’s true that many firms pay a lower rate because of exemptions, deductions and loopholes (Chart 2). However, the tax-avoidance strategies necessary to do so consume resources that could be used more efficiently elsewhere while penalizing firms that don’t or can’t use these tactics.

[click image below to continue reading]

Source research/eclett/2017/el1706.pdf

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