How should we tax companies in a world of mobile capital and global corporations? How should we encourage corporate investment and discourage financial engineering? How should we reduce the taxation of labour? How should we tax rent, rather than productive activity? How should we discourage complex tax avoidance? How, not least, should we reduce incentives for a global race to the bottom on taxation of companies?
These are immensely important policy questions. They matter not only for the ability of governments to raise revenue, but also for the political legitimacy of capitalism. Sadly, some good answers to these questions were under discussion in the recent US debate on reform of corporate taxation, but were buried in the end. The reform had two principles: tax would fall on cash flows and it would apply to the destination of corporate transactions, not to their origin. Some experts have proposed a system known as a “destination-based cash flow tax”. It has much in its favour.
The tax base for such a system would be non-financial inflows, less non-financial outflows. (A base that includes financial inflows and outflows is also feasible. But I will ignore that here.) The costs of investment and labour would be deducted as made, but no deduction would be allowed for financial costs. The full expensing of spending on investment would make the government a partner in investment projects, contributing to them and gaining returns from them in equal proportion. The tax would ultimately bear on corporate rent — returns above the costs of the factors of production (including capital) needed to create them. Rent is also what we should tax.
